Tomorrow is WalMart’s Ex-Dividend date. We were short some shares and did not want to pay the dividend. (Yes, if you are short – you pay the dividend!). There are many strategies to handle this, including just paying it. We decided to buy some shares and sell calls, setting up a covered call to end the day with only option positions. No shares owned, no shares short. It’s paying us about $60 a day with little Delta risk. Our profit since inception is about $360.
This concept of the Ex-dividend date is very important to understand. WalMart goes Ex-dividend on May 7. Anyone who owns shares prior to that date will become eligible for the dividend. (It is always paid to you at some future date, but the list of shareholders who will be paid is set on the Ex-dividend date). Often, if you are holding an in the money covered call position, your shares will be called away on the day before expiration. That’s an OK result. You collect all the remaining intrinsic value of your short calls, sell your shares, and have cash to start a new position. Another possible result is that you keep your shares, keep your short calls, and collect the dividend. Either one of these is good for your account!
On the other hand, staying short and paying the dividend out to someone else is an expensive result that you usually want to avoid. Once cash goes out of your account, you need to make it back. If you think holding short shares with puts sold against them will generate more money than you lose by paying the dividend, then that position can be held. It’s up to you to estimate that outcome and make the decision. It is certain that cash will leave your account if you are short the shares, but uncertain that you can make it back in a reasonable time period. In this case, I like to take the sure thing and try to avoid having the cash withdrawn.
One other thing to be aware of. If you are short in the money naked calls overnight as a stock goes ex-dividend, you can be looking at a different position the next morning. You may find that your calls have been exercised, you sold shares short and paid the dividend. I must admit that I forget to check for this structure a little too often. More on this some other time……..but hopefully you understand that options on dividend-paying symbols have their own complex relationships to the Ex-dividend date.
Stay Optioned, My Friend!