By John J Critchley, Jr.
Well, it finally happened. The much anticipated and speculated-upon Apple (AAPL) dividend has been announced. The company said it would begin giving shareholders a quarterly dividend of $2.65 per share sometime in its fiscal fourth quarter, which begins in July.
What does this mean for the option marketplace? The $2.65 quarterly dividend will decrease call values and increase put values. The longer dated options will be affected the most, and any options expiring before the fourth quarter Ex-Dividend will not be affected at all. Simply stated: Call values do not like dividends, and Put values do.
Cash dividends issued by stocks can have a significant impact on the option prices of the underlying. The reason for this is because the price is expected to decrease by the dividend amount on the ex-dividend date. Meanwhile, options are pricing taking into account the expected dividends payable in the time frame leading up to the option expiration date. Consequently, options of high-dividend-paying stocks have lower premium calls and higher premium puts.
Option pricing models usually price call options with the assumption that they are only exercised on the expiration date. Due to the fact that the owners of the stock as of the ex-dividend date receive the dividend amount, sellers of call options in dividend paying stocks are assumed to receive the dividends and consequently the call options can get discounted by as much as the dividend amount.
Put options get more expensive after a new dividend or dividend increase is announced due to the simple fact that stock price always decreases by the dividend amount after the ex-dividend date.
Let's look at the options marketplace and see how this dividend announcement has affected the option prices in AAPL.
No dividend in AAPL
Underlying at $599.84
If we use a 32.22 Implied Volatility and employ a simple Black Scholes pricing model:
Theoretical values of Jan '13 600 calls = $71.31
Theoretical values of Jan '13 600 puts =$69.03
$2.65 dividend in AAPL. The Ex-Dividend date will be in the last quarter of 2011 and since the fiscal fourth quarter for AAPL begins in July, the marketplace is anticipating two dividends before Jan '13 expiration.
Underlying at $599.84
If we use a 32.22. IV and employ a simple Black Scholes pricing model
Theoretical values of Jan '13 600 calls = $68.825
Theoretical values of Jan '13 600 puts =$71.40
The Jan '13 600 calls went down approximately $2.485 ($71.31- $68.825 = $2.485)
The Jan '13 600 puts went up approximately $2.37 ($71.40- $69.03 = $2.37)
There you have it. The value of AAPL options has been affected by the size of the dividend. Lucky for all those long-term AAPL puts buyers, not so good for the owners of long-term calls. Stay tuned.
Notes: Prices quoted where the prices at time of submission and do not reflect current market prices.
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