Last dance for options trading strategy ahead of Apple dividends

“Options dealers looking to snag the coming dividend payment on Apple Inc’s shares sent the iPhone maker’s call volume to a record on Wednesday, but new options market rules mean this may be their last chance for such a strategy,” Saqib Iqbal Ahmed reports for Reuters. “Large market makers have long used a dividend-linked options trading strategy to make easy money by taking advantage of a hole in the Options Clearing Corporation’s rules on clearing trades. New rules set to take effect later this month will close that loophole.”

“Investors who own call options that are in the money – when the option’s strike price is below the price of the shares – can turn those options into shares just before the quarterly ex-dividend date for dividend-paying names. The ex-dividend date is the day on which an investor must own shares in order to collect that quarter’s dividend,” Ahmed reports. “Many investors don’t do this, however, for various reasons. That’s where dealers step in – by buying and selling a large number of call options of the same stock at the same strike price on the day prior to the stock’s ex-dividend date.”

“Because many retail traders don’t elect to buy the underlying stock, the dealers end up in a position to collect dividends on shares they don’t intend to hold for long,” Ahmed reports. “‘They basically end up making free money,’ Adam Perlaky, chief strategist at New York-based broker New Albion Partners LLC, said. ‘It’s clearly a gaming of the system.'”

“The prevalence of this activity is exemplified by recent Apple trading volumes. With the company’s ex-dividend date on Thursday, on Wednesday more than 4.6 million Apple call options traded, a one-day record,” Ahmed reports. “Between August 2012 and now, four of the six most active days for Apple call volume have been on the day before the ex-dividend date, according to Trade Alert data.”

Much more in the full article here.

5 Comments

  1. Precisely because of this, I don’t get why announced, future, ex-dividend dates are even needed in this modern era of instant-trade. It rewards traders, not investors.

    Dividend dates are announced during earnings. OK. So why doesn’t it make sense that you had be a shareholder the day the earnings are announced? This way investors could be properly rewarded for sticking with the company if it’s announced it performed well that quarter and stock goes up, and traders are punished if earnings are (interpreted) to be lower than expected and the stock goes down.

    1. Not really feasible. All the shareholders have to be tallied at the end (or beginning) of the ex-dividend day. Legally Apple probably have to inform shareholders when that is going to be. They can’t just do it at the same time of the announcement. Keeping track of all the share transactions is not that simple so you need a few days to make sure all the trades are accounted for.

      1. That’s kind of what I mean. Just make the ex-dividend day the day of the earnings announcement, which is known several days in advance at least.

        I refuse to believe that in this day and age of micro-second trades and pre/post market trading, that it takes several weeks for trading systems to resolve all the share transactions of a particular day. Even when there’s been monumental screwups and trades in a stock between certain times are *undone*, it’s all finished within days.

        I don’t mean they have to pay the dividend the same day as the announcement, merely that all shareholders and resolved buys marked for that day are the ones that get it. This way even if a trade takes a day or two later to resolve, it’s still (forgive the bad analogy) “postmarked” for the day of the earnings report.

        1. … when various Xdiv days will pop. Well … not precisely, but that’s the idea. I can look at the page for “this week” and see which stocks will go Xdiv in three weeks. This is predictable. There are 52 weeks on my charts. From one to a dozen stocks on each, each offering at least a 2% gain. 2% in three weeks. With low risk. Just not “no risk”. Though, I’ve never actually LOST money … some of my investments have lasted much longer than the planned three weeks. I don’t have the nerve to do options, though.

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