There are 2 possible ways to make money using calls on stocks that are about to pay a dividend. How the Dividend Spread Arbitrage Worksĭividend spread arbitrage is risk arbitrage, because there are potential losses, depending on market conditions and trading costs. Traders anticipating the price drop for their calls will sell on the day before the ex-date, especially calls expiring soon. The price declines on the ex-dividend date because both the company's book value has decreased by the amount of the paid-out dividend and the dividend is no longer imminent.Īs in-the-money calls move with the stock price, they, too, will rise before the ex-date, then decline on the ex-date. The run-up in price occurs because investors are willing to pay more if they are expecting to receive the dividend soon, which offsets the increased price. Moreover, open buy and stop sell orders are also reduced by the dividend amount on the ex-dividend date. The price of the stock increases steadily until the date of record, then drops by the approximate amount of the dividend on the ex-dividend date. An investor who buys the stock that settles on or after the ex-dividend date will not be entitled to the recently declared dividend. The ex-dividend date (aka ex-date) is the 1 st day in which the stock trades without the recently declared dividend. The payment date is about 3 weeks after the date of record.īecause it takes 2 business days to settle a stock trade, the date of record determines the ex-dividend date, which is 2 business days earlier. The date of record is the date when a stockholder must be a registered owner of the stock - a holder of record - to receive the dividend. When the board of directors declares a dividend, which is on the declaration date, they also specify the date of record and the payment date. How The Dividend Is Paid and How It Affects the Stock Price
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