What are dividends and how do they work?

Learn how to use covered calls to reduce the price of buying a call or to hedge for the downside potential of your existing stocks.

Finance | Personal finance

Dividends

Learn how to set up and profit from diagonal calendar spreads

Dividends for a company are “announced” on the announcement date. They are paid out on the ex-dividend date. In the period between the announcement date and the ex-dividend date, the stock price will in general move up as buyers want to profit on receiving the dividend pay-out if they own the stock. The stock will generally drop in value on the ex-dividend date after the pay-out as these buyers no longer have a need for owning the stock unless they already wanted to own the stock. The company will is theoretically worth less after paying out the dividend. Note that a buyer will not receive a dividend unless they own ( are long ) the stock between the ex-dividend date and the record date.

What percentage of companies in the S and P 500 pay out dividends?

2018- 80 percent paid dividends

Why do stock prices go up between the dividend announcement date and the ex-dividend date?

Toggle Content

What is the ex-divident date?

Toggle Content

Why do stocks decrease after the ex-dividend date?

Toggle Content

How do stocks react after the ex-dividend date?

Toggle Content

Is a company worth more or less after paying out a dividend?

Toggle Content

What is the record date with respect to understanding dividends

Toggle Content

True or False : If you are short a stock between the ex-dividend date and the record date, you will have to PAY dividends?

True

True or False: If you are short a stock between the record ate and the payment date but owned then before the record date, you will still be able to receive a dividend?

True

How frequently do most companies pay out dividends?

Most companies will pay out dividends quarterly, but some will pay out semiannually or even annually.

Option Basics

Credit Spreads

Sell ATM Call
Sell ATM Put
Set up for 30-45 days DTE

Vertical Spreads

How Do You Set Up a Short Straddle?

Implied volatility (IV) plays a huge role in our strike selection with straddles. The higher the IV, the more credit we will receive from selling the options. A higher credit ultimately means we will have wider breakeven points, since we can use the credit to offset losses we may see to the upside or downside. At the end of the day, a larger relative credit results in a higher probability of success with this strategy.

Our target timeframe for selling straddles is around 45 days to expiration. Our studies show this is a great balance between shorter and longer timeframes.

Selling straddles can be highly profitable when the stock price doesn’t rise or fall quickly.

Selling a Straddle

Profit and Loss Calculations

Max Profit Potential: Total Credit Received x 100
Max Loss Potential: Unlimited
Upper Breakeven = Strike Price + Total Credit Received
Lower Breakeven = Strike Price – Total Credit Received
Estimated Probability of Profit: Generally between 50-60%.

Buying a Call

Management and Adjustments

With premium selling strategies, defensive tactics revolve around collecting more premium to improve our break-even price, and further reduce our cost basis.

With short straddles, we don’t have much wiggle room because the short options are already on the same strikes. One option is to roll the whole straddle out in time, using the same strikes.

This can be done for a credit, and we will hope for the stock price to return to our short strike by the new expiration.

Profit Zones

Short straddles profit from very small moves
Long straddles profit from very large moves

Probability of Profit

Short straddles have a hight probability of profit
Long straddles have a low probability of profit

Short Straddles vs Long Straddles

How Is a Short Straddle Different From a Long Straddle?

Short straddles are neutral strategies that are range-bound. You are SELLING a call and a put for a premium and at the same strike price. You want the stock price to stay inside the break even points; and ideally directly in the middle.

Long straddles are price indifferent strategies. You are BUYING a call and a put for a debit at the same strike price. Because you are LONG a call and a put, you want the price to move dramatically in either direction outside the break even points.

Option Basics

Tips and Tricks

A short straddle option will benefit from :

Ideal strategy for the day or period before earnings.
Good strategy for the day before expirations
Setting up in periods of extremely high IV ( 50-80% )
Thereafter, you want implied volatility to decrease
Take profits at about 25-30%

Short Straddles

The Greeks

Neutral Delta – Delta measures directional risk. For every dollar increase in the stock, the option price will increase by the delta value. The short call will have a negative delta. The short put will have a positive delta. Because they basically cancel each other out ( neutral strategy ), the overall delta is around zero. .

Negative Gamma – A short options position gamma gets closer to 0 as the stock price increases and closer to 1 as the stock price decreases.

Positive Theta – Theta indicates how much an option will change per day. Short contacts gain value with time and with the approach of expiration. The extrinsic value of options decays as time passes, which is beneficial to option sellers. Time decay increases as you approach expiration

Negative Vega – Vega measures the change in the options price for every 1% increase in implied volatility. In other words, for every 1% increase in implied volatility, the option will increase by the amount of vega. Short straddles are negative as they profit from a decrease in implied volatility. Long straddles are positive as they profit from an increase in implied volatility.0