If long an equity call option will you receive a dividend paid to underlying shareholders?
No. In order to receive a dividend you must own shares. If the underlying stock is about to pay a dividend and you wish to receive the dividend you must first exercise the call and purchase shares on a timely basis. Generally, you must give instructions to your brokerage firm to exercise the call contract on the day before the ex-dividend date in order to be eligible for dividend payment. Consult with you brokerage firm on both the advisability and procedures for doing this.
If long an equity put option do you have to pay the dividend?
No. Owning a put conveys only the right to sell underlying shares at the strike price at any time before the put expires. This in no way obligates you to pay a dividend to anyone. On the other hand, if you have a short stock position in a stock that pays a dividend you generally do have to pay the dividend amount to whomever loaned you those shares.
If you have a covered call position are you eligible to receive a dividend?
As long as you still own the shares on the dividend's record date you will be eligible to receive a dividend paid to underlying shareholders. If you are assigned on the short call, your 100 underlying shares are called away, and you do not own shares on the ex-dividend date you will generally not be eligible to receive a dividend payment.
What is a contract adjustment?
Whenever the terms of an equity option contract have been changed to terms different from its original standardized terms, such as the contract's deliverable (unit of trade) after an underlying stock split, or corporate action such as a take-over, merger or special stock or cash distribution, those terms will be adjusted to account for this.
How can you tell if an option contract's terms have been adjusted?
Among the features that might raise your attention in this regard are:
- The option appears "mispriced" relative to the value of the underlying stock and the option's strike price - especially if all calls and puts in the class appear to be mispriced - and the price(s) appear "too good (or too bad) to be true."
- On an option chain you find two calls or puts with the same strike price but with different option symbols (e.g., XYZ vs. ZYX) and different premium amounts.
If because of either reason above, or any other reason, you suspect that a contract's terms have been adjusted then you should by all means attempt to verify this. Costly mistakes may result from trading an adjusted contract inadvertently. For options traded on the Cboe, the Contract Adjustments area of this Website contains bulletins issued that outline all contract adjustments made because of splits, mergers, special distributions and the like. Alternatively, consult with your broker.
Are contract adjustments standardized?
For underlying stock splits there are standard adjustments commonly made to strike prices and units of trade when necessary. For other types of underlying corporate action, such as mergers, take-overs, spin-offs, and special distributions of cash and/or stock, adjustments fit the circumstances and terms of each action, and these vary from situation to situation. If you have, or are contemplating an option position in any class of options that is undergoing contract adjustments, be on the alert. Make yourself fully aware of what the adjustments are and how they may affect you financially.
Are strike prices adjusted to account for regular cash dividends?
No adjustments to strike prices are made when an underlying stock pays an ordinary, regular (e.g., paid quarterly) cash dividend. On the ex-dividend date the underlying stock will open less the dividend amount, but by that point the marketplace will generally have adjusted the prices of calls and puts to account for this.
Can you use options in an IRA account?
In general, certain option strategies may typically be allowed. Brokerage firms have their own policies and limitations for option trading in IRA accounts so check with your own firm for specifics.
What is the OCC?
The Options Clearing Corporation is the sole issuer of all securities options listed at the Cboe, four other U.S. stock exchanges and the National Association of Securities Dealers, Inc. (NASD), and is the entity through which
all Cboe option transactions are ultimately cleared. As the issuer of all options, OCC essentially takes the opposite side of every option traded. Because OCC basically becomes the buyer for every seller and the seller for
every buyer, it allows options traders to buy and sell in a secondary market without having to find the original opposite party.
The OCC substantially reduces the credit risk aspect of trading securities options as the OCC requires that every buyer and every seller have a clearing member and that both sides of the transaction are matched. It also has the
authority to make margin calls on firms during the trading day.
Are there requirements a company must satisfy before it is allowed to trade
options on its own stock?
Among the requirements a company must satisfy is “distribution”. There must be a certain number of outstanding shares, and the shares must be owned by a minimum number of people. Otherwise, ownership of the stock is
deemed “too highly concentrated”. The NYSE and NASDAQ also have listing requirements.
Although Cboe has staff that is constantly reviewing stocks that are candidates for listing, it is possible that a stock has been overlooked. If you feel this might be the case, you can suggest it. Just visit the Contact Cboe page and send your request to "New Option Listing Requests" within the "Product Listings & Trading Inquiries" drop-down menu.