I recently received an email from a reader:
Are there situations with options plays where we need to be careful of the underlying’s ex-Div day falling within our option’s time frame?
The short answer is: YES.
The real answer is: it depends.
It’s only really an issue if your position includes any short call options, and then only if those short call options are in-the-money.
If you are holding short calls that are deep-in-the-money (for example, you’re short 50 strike calls when the underlying is trading at $59), you will most likely be assigned short stock against your short calls and additionally you’ll then owe the upcoming dividend (it will be deducted from your trading account on the day the dividend is paid). At the end of the day, the overall P/L of this trade shouldn’t theoretically be impacted as options traders were pricing in the dividend to the price of the options you’re trading, but it does add additional commissions and administrative headache to take assignment of short stock you didn’t want (along with any possible margin complications that come along with it).
Best to just avoid the situation all together.
Heading into the ex-dividend date, if you are holding short in-the-money calls in your position, here’s a quick hack to determine if it’s likely you’ll be assigned short stock: check out the bid price of the corresponding out-of-the-money put option. Going back to the example above, if you’re short the 50 calls and they are in the money, check out the bid price of the 50 puts. If that bid price (the premium) is higher than the expected dividend (a quick google search will help you find the expected dividend), then you don’t have much risk of assignment. If, however, the put premium is lower than the expected dividend (or close), then you’re at high risk of being assigned and you may wish to close that position out and re-establish after the ex-dividend date.