“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.