If you've been following tastytrade live on a regular basis, you are probably already aware that some new shows have been added to the daily lineup.

Here at tastytrade, we're always trying to optimize our coverage in order to provide the most compelling and impacting content possible.

One new show receiving a lot of positive feedback is From Practice to Execution.

This new series partners Mike (Mike and His Whiteboard) and Dr. Schultz (From Theory to Practice) with the goal of moving some important topics past the concept stage and into execution.

We encourage you to reach out at support@tastytrade.com if there's a particular subject you want featured in the future.

While we recommend catching all the episodes in this new series, a recent installment focusing on dividend risk is one you definitely shouldn't miss.

Dividends are a distribution of a company's earnings (or reserves) usually in the form of cash or stock and typically paid on a quarterly basis. Dividends are closely followed by investors looking for income and consequently by portfolio managers and products that are built around this strategy.

There are a myriad of ways that market participants filter equity markets for dividend yield (amount of annual dividend divided by stock price).

Dividends also play an important role in options trading because they almost always result in an adjustment to the underlying price of a stock.

For example, if company XYZ pays a regular dividend of $1, then the stock price will open $1 lower on the day the stock starts trading "ex-dividend" (more on this below). This obviously has a direct affect on the value of XYZ's options, as well.

There are several important dates that investors need to monitor when it comes to dividends:

  • Declaration Date - the date a dividend is announced by the Board of Directors

  • Record Date - the date one must own the stock in order to be legally entitled to the dividend

  • Ex-Dividend Date - purchasers of the stock on this date (or after) will not be entitled to receive the dividend (also the date that the stock's price is adjusted down at market open by the amount of the dividend)

"Regular way" stock settlement takes 3 business days (T + 3), which means one must purchase a stock 3 business days before the record date in order to be legally entitled to receive the dividend. One business day before the "ex-dividend date" and 3 business days before the "record date" are therefore the same (*usually, barring special circumstances).

Dividends aren't always "regular" so make sure you have a clear understanding of the amount and timing (record date, ex-dividend date, etc...) for dividend-paying stocks in your portfolio.

Another aspect of dividends to keep in mind is that they are tied to a company's earnings. This relationship means that improvement or deterioration in a company's profitability may result in the increase or decrease of a company's dividend.

Such changes can therefore have an affect on the price of options - particularly longer term options.

If a company's business prospects improve significantly over the course of several months, expectations for an increase in the dividend may start to appear in the market. A larger dividend means that the stock will be adjusted down relatively more, which is good for puts (value increases) and bad for calls (values decrease).

The reverse is true for companies that are expected to reduce their dividend (i.e. puts decrease in value, calls increase in value).

At tastytrade we often focus on options with 45 days to expiration (DTE). As a result, there's far less concern over changes in dividend expectations because dividend values over that window are relatively more certain (i.e. the exact dividend amount may even have already been announced).

One dividend risk that can play out during the 45 DTE is the risk of early assignment. And it's this exact topic that is covered on the aforementioned episode of From Practice to Execution.

We hope you'll take the time to watch the entire episode dedicated to this topic when your schedule allows.

If you have any questions about dividend risk as it relates to options trading we hope you'll reach out at support@tastytrade.com.

We look forward to hearing from you!


Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.