If you use strategies with short options, it’s important to know the ex-dividend date—the first day following a dividend declaration when a stock buyer is not entitled to the next dividend payment.
Learn to monitor ex-dividend dates of stocks to avoid being unexpectedly assigned.
Determine when early assignment might occur, and how to reduce the likelihood.
For some traders, it seems that the ex-dividend date can sneak up on them when they aren't paying attention.
What is an ex-dividend date?
An ex-dividend date is the first day following a dividend declaration when a stock buyer is not entitled to the next dividend payment. This date (also called the ex-date) represents the day on which the seller will be entitled to an upcoming dividend instead of the buyer.
What are the pitfalls of ex-dividend dates for options traders?
If you regularly use any option strategy that involves short calls, you may have experience being assigned on the day right before the ex-dividend date.
- If you're a covered call writer, this means you could lose your stock position, but also the next dividend payment.
- If you're an uncovered (naked) call seller, short straddle seller or a call spread trader, you'll not only have to cover a short stock position at a potential loss, but you'll also have to pay the dividend to the stock holder of record on the payment date.
In this article, we’ll explain why dividends increase assignment risks for options and show you how to:
- Find and monitor the ex-dividend date for stocks
- Screen for stocks that are approaching an ex-dividend date
- Determine when early assignment might occur and reduce the likelihood
Why do dividends increase the assignment risk for options?
When a stock goes ex-dividend, for a normal quarterly dividend payment, the opening price of the stock is adjusted by the amount of the dividend on the morning of the ex-dividend date.
However, option prices are not adjusted for normal quarterly dividends. As a result, when you use strategies that involve short calls on stocks that pay dividends, the owner of the calls often has an economic incentive to exercise the call option. This usually occurs the day before the stock goes ex-dividend, if the call option is in the money and the amount of the dividend exceeds the remaining time value in the option. This incentive exists because the [strike] price he will pay for the stock is the same before the ex-dividend date or after, but if you exercise before the ex-dividend date, he will be the owner of record when the dividend is paid.
Find the ex-dividend date
If you use strategies involving short calls, it's important to know whether the underlying stock pays dividends, and if so, when the ex-dividend dates occur. The easiest place to find the ex-dividend date is on the Summary tab of the Research > Stocks page of Schwab.com.
How to find the ex-dividend date using Schwab.com
If you trade on StreetSmart Edge, you can jump to this page by selecting "Research" from the Schwab.com menu at the top of your screen. In addition, if you've added a Schwab Equity Ratings® column to your Watch Lists or Positions pages, you can click on the letter grade and the Research page will launch automatically.
How to find the ex-dividend date using StreetSmart Edge
Source: StreetSmart Edge
Note: If the ex-dividend date listed on Schwab.com has already passed (as in the example above) and the security pays dividends on a quarterly basis, you can add three months to the date shown as an approximation, until the exact record date is announced by the company and the next ex-date can be determined. Dates can sometimes vary due to weekends and holidays. Keep in mind that stocks are not required to pay dividends at all and can reduce or eliminate their dividend at any time, for any reason.
Screen for stocks approaching ex-dividend dates
If you plan to use a strategy that involves searching for stocks that are going ex-dividend within the next seven or 30 days and/or pay dividends that exceed a certain yield percentage, you can create a screener.
From the Overview tab of the Research > Stocks page of schwab.com (as shown below), select "Screeners," choose "Create My Own" and then select Basic criteria: "Optionable Stocks." I recommend you check a large enough "Average Volume (10 Day)" (perhaps 500,000 to one million shares), so you can avoid any illiquid stocks. Then select the following Dividend criteria:
- "Annual Dividend Yield" and pick your yield range(s)
- "Upcoming Dividends" and pick your timeframe
How to screen for stocks going ex-dividend
Once you've created this screener, be sure to click "Save Screen" so you can quickly recall it. These screens can be accessed any time you login to your account on schwab.com.
How to monitor ex-dividend dates in StreetSmart Edge
In StreetSmart Edge, dividend information can be displayed directly on the chart. From the Chart tool, open the settings drawer and select "Dividends" from the Corporate Events section. Doing so will create small flags labeled with a "D" on the charts which identify the ex-dividend date. Historical ex-dividend dates will be represented by a down arrow while right arrows indicate upcoming ex-dates. If you mouse over the arrows, you can find out the dividend amount, the ex-dividend date and the payment date.
Source: StreetSmart Edge
In addition to the dividend flags, you can also display the Ex-Date, Ex-Date Amount, Annual Dividend Amount, Annual Dividend Yield and Pay Date as columns in a Watch List or Positions page.
Source: StreetSmart Edge
Determine when early assignment might occur
Let's look at some examples to assess the likelihood of early assignment.
Covered call: Assume you've previously written a September covered call with a strike price of 140 against your 100 share position of TRV. The stock has risen in price since you wrote the call, and it's now in the money by $9.21. The ex-dividend date is tomorrow and the covered call is still 12 days away from expiration. By comparing the amount of the dividend to the remaining time value on the option, (as circled in red below) you can see that the dividend is $0.48 greater than the remaining time value.
When an option is exercised, any remaining time value is lost. Because each option covers 100 shares of stock, the owner of these calls will pay $140 per share for the stock. The owner will lose $34 on each call option exercised, but gain $82 in dividends in about three weeks. If the owner doesn’t take action before market close, the likelihood of being assigned early is extremely high. (On the other hand, if the remaining time value had exceeded $0.82, the likelihood of assignment would be extremely low).
Assess the likelihood of early assignment
Source: StreetSmart Edge
Most early assignments happen the day before the ex-dividend date. In the example above, you could retain your position in TRV and remain the owner of record when the dividend is paid by either buying back the covered call to close out your position, or entering a rollout by closing this covered call and simultaneously selling a new covered call for a later expiration date. Because the time value of a later expiration will likely exceed the dividend amount, early assignment will almost certainly be avoided for now. Alternatively, you could do a roll-up by buying back this covered call and selling another covered call with a strike price that is out of the money.
Bull call spread: Assume you don't own TRV shares but you have previously established a bull call (vertical) spread by buying 10 Sep 135 strike calls and selling 10 Sep 140 strike calls. As you expected, TRV has risen in price (to $149.21) and now both options are in the money. As with the covered call example above, because your short 140 strike calls are in the money by $9.21, but the dividend is $0.48 greater than the remaining time value, you anticipate early assignment tonight.
If you take no action before market close, tomorrow you'll be short 1,000 shares of TRV at a price of 140. Whether you choose to retain your short position or not, you'll be responsible for payment of the dividend ($820) on Sep 30. If you retain your short position, you have the added risk of being short a stock on which you were previously bullish.
To eliminate these risks before you get assigned, you could sell your 10 long 135 strike calls in the market and apply the proceeds to cover a portion of the cost of purchasing 1,000 shares of TRV. This 1,000 share purchase will then turn your short 140 strike calls into a covered call position. Doing so would eliminate the dividend payment obligation; however, since the stock will likely be called away tonight, you would not be the owner of record and would not receive the dividend payment on the payable date.
Alternatively, you could exercise your calls and purchase 1,000 shares of TRV at 135 because the bid price of the 135 calls is currently $0.01 below the intrinsic value (14.20 versus 14.21). Again, this effectively covers your short 140 strike calls. If you are assigned, you would eliminate the dividend payment obligation (just like if you purchased the stock outright). However, because the stock will likely be called away tonight, you would not be the owner of record and would not receive the dividend on payable date.
In this example, there is little difference in exercising the calls versus selling the calls and buying the stock in the market. If you exercise, you'll receive the full intrinsic value of the options (as opposed to $0.01 less per contract) and you eliminate the commission charge of selling the options. You will, however, have to pay a commission to exercise your calls.
What you should know
- If you use any option strategy involving short calls, such as covered calls, naked calls, call spreads or short straddles, when those calls go in the money and expiration is a few weeks out or less, early assignment usually occurs exactly one day before the ex-dividend date.
- If you use any option strategy involving short puts, such as covered puts, uncovered (naked) puts, CSEPs, put spreads or short straddles, when those puts go in the money and expiration is a few weeks out or less, early assignment usually occurs exactly on the ex-dividend date. This allows the put holder to remain the shareholder of record and receive the dividend on payable date.
- Early assignment is less likely (though not impossible) on index options or stocks that do not pay dividends, because there's typically no economic benefit to the option holder.
Don't get caught off guard
As you can see, the ex-dividend date can take on enormous importance if you use strategies with short options. Be sure you watch out for ex-dividend dates so you won't encounter any surprises.