Investors aren’t used to dividends in Apple (AAPL). In fact it’s been 17 years since the now, wildly popular and much, much, much larger company declared a quarterly payout. That said, Thursday’s $2.65 ex-dividend date didn’t go unnoticed by option traders Wednesday looking to feed on other investors possibly asleep at the wheel.
In front of the event, Apple’s always impressive option volume surged ten-fold to more than 1.63 million contracts in activity dominated by calls by a 9-to-1 margin with concentrated bedlam in a large number of its deeper in-the-money contracts sporting significant open interest.
The game being played in anticipation of the ex-date rests on traders trying to capture the dividend through “potential” buy-write positions. If assignment is avoided, the secured buy-write will enjoy the dividend as the fruit of their labor as that amount, $2.65, in effect gets lopped onto the price of the long stock / short call position held.
How this works most often and simply is traders will locate strikes sporting the fore-mentioned large pools of open interest in deep calls whose adjacent puts maintain a market value less than the price of the dividend. Vertical call spreads will then be negotiated / swapped back and forth for the same price so both sides have a shot of having short calls within the existing targeted calls which maintain high open interest leading into the ex-date.
After executing the swapped spreads the trader then exercises his or her long call contracts while hoping to walk away unassigned on the short calls. This bit of somewhat confusing magic wherein a trader can exercise a strike while also being assigned, rather than having a positional wash if the same strike was bought and sold as part of two verticals, is courtesy of the Options Clearing Corp and the same day exercise mechanism.
The crux in actually making money off this strategy is two-fold. First, the trader will need the existing open interest to forget or simply decide not to exercise their own long call position. Secondly, the trader will require a good deal of Lady Luck regarding the Option Clearing Corp’s lottery style assignment process, which the trader is hoping to avoid.
When all goes as planned and the trader finds some of these short calls backed up by long stock in their possession (from their same day exercise); what had been verticals traded for max value and no profit potential turns into a buy-write sold for $2.65 per spread. And when the real, equivalent strike put is trading for less than $2.65, the difference can be pocketed the next session by simply purchasing the put which then establishes a delta free conversion. Better yet, if the trader purchases a closer to the money put for less than the $2.65, they’ll have a bear put spread on for a credit.
So, why isn’t everyone doing this? Well, judging by the interest in Apple’s affected strikes; it does show quite a few traders were in it, to win it last night. A “theoretical” but likely example of an evenly and heavily traded vertical for $5.00 back and forth with the sole purpose of trying to capture the dividend can be found in the AugWk2 605 and 610 calls with roughly 8,600 contracts apiece trading versus open interest of 1,800 & 2,900 and put values of $1.21 and $0.64 compared to the desired $2.65 payoff.
Another and even sweeter deal if it works out due to the smaller buy-write / short put risk is the well-traded regular August 555 and 560 calls. Volume on both strikes was about 22,000 versus open interest of 2,300 and 3,300 and put values of $0.33 and $0.31. That all said, the reality is most often with the dividend play there are a lot of commissions involved with no payoff as all the targeted strikes see their open interest disappear overnight. Much to the chagrin of yesterday’s fast money crowd, the other trader, it turns out, isn’t asleep at the wheel. However, given Apple’s history of dividends hasn’t been steady and for all intents and purposes is brand new, appreciating the dollar size of payout and as the name still maintains a bit of volatility maybe making that simple put purchase the next day, a slightly more thorny affair; we think the game has been elevated to a more interesting one in this particular instance.
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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