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When viewing option chains while crafting our covered call writing portfolios, from time-to-time we will see unusual strike prices. These anomalies are usually associated with various corporate events that result in option contract adjustments. Such events include stock splits, mergers and acquisitions and the one highlighted in this article, special 1-time cash dividends. In July 2017, New Oriental Education and Technology, Inc. (NYSE: EDU) announced a $0.45 special 1-time cash dividend:

option contract adjustments

EDU: Special 1-Time Dividend Announcement

Since a dividend distribution results in share value declining by the dividend amount (in most cases as you will soon see), it would be unfair to a call buyer to own a specific strike and now learn that share value will drop by $0.45 prior to contract expiration. As a result, the Options Clearing Corporation (OCC) adjusts option contracts such that buyers and sellers of calls and puts are “made whole” The result is strike prices dropping by the dividend amount for all call contracts currently in place, $0.45 in this case. This would lead us to believe that all $95.00 call strikes would be adjusted to $94.55 on the ex-dividend date.

 

Checking ex-dividend dates (www.dividendinvestor.com)

contract adjustments for option selling

Ex-Date for EDU Special 1-Time Cash Dividend

 

Dividends distributed by American Depository Receipts (also ADRs- foreign companies trading on US exchanges)

The first item that stands out is that the dividend is listed at $0.43, not $0.45. When ADRs distribute dividends, there is a bank intermediary that takes a transaction commission, $0.02 in this case. This results in a dividend distribution of $0.43 and option contracts will be adjusted by this latter number. All contracts that were in place at the time of the announcement, even those expiring after the ex-date contract month are adjusted.

 

Option chain for January 2019 reflected adjusted strike prices

 

option contract adjustments from special 1-time cash dividends

EDU Option Chain with Unusual Strike Prices

The current $94.57 strike price was originally a $95.00 strike price prior to the special 1-time cash dividend announcement.

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Discussion

When unusual strike prices are listed in an option chain, it is usually the result of a corporate event that changes the parameters of the stock value. The Options Clearing Corporation will step in and make the necessary contract adjustments to make buyers and sellers of calls and puts “whole” American depository receipts will include the added adjustment for bank transaction costs.

 

New book and 3 new calculators now available in the BCI store/ Discount coupons

Our new book, Covered Call Writing Alternative Strategies and the 3 new calculators associated with the 3 strategies highlighted in this book (Portfolio Overwriting, The Collar Strategy, The Poor Man’s Covered Call) are now available in the BCI store. We are offering an early-order discount promo code for the book and the 3-calculator package:

newbook5: $5.00 off the price of the new book ($27.00 – $5.00 = $22.00). The book will cost $35.00 when available on Amazon.com.

3calculators20: $20.00 of the price of the 3-calculator package ($79.00 – $20.00 = $59.00)

Link to BCI store: 

 

 

The Blue Collar Investor recently highlighted in a German publication (English translation version)

Click to access article

 

Enhancement to BCI Premium Stock reports coming soon

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The BCI team will be adding an additional screen to the stock selection process to replace the Scouter rating screen. The new screen will include an evaluation of the consensus analyst recommendations for each security that has passed all other BCI screens. Our team has been testing the new screen and we have concluded that this change will represent an enhancement to the quality of the products we provide to our members. More details to follow.

 

Upcoming event

Chicago Stock Trader’s Expo: All Stars of Options

Sunday July 22nd 12:30 PM – 1:15 PM

“How to Select the Best Options in Bull and Bear Markets”

Hyatt Regency Hotel @ McCormick Place

2233 South Dr. martin Luther King Jr. Drive

Chicago, IL 60616

Click here for details

See all events

 

Market tone

This week’s economic news of importance:

  • Chicago Fed national activity index May -0.15 (0.42 last)
  • New home sales May 689,000 (668,000 expected)
  • Case-Shiller US home price index April 6.4% (6.5% last)
  • Consumer confidence index June 126.4 (128 expected)
  • Durable goods orders May -0.6% (-1.3% expected)
  • Pending home sales May -0.5% (-1.3% last)
  • Weekly jobless claims 6/16 227,000 (220,000 expected)
  • GDP revision Q1 2.0% (2.2% expected)
  • Personal income May 0.4% (as expected)
  • Consumer spending May 0.2% (0.4% expected)
  • Core inflation May 0.2% (as expected)
  • Consumer sentiment (final) June 98.2 (99.0 expected)

 

THE WEEK AHEAD

Mon July 2nd

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  • Markit manufacturing PMI (final) June
  • ISM manufacturing index June
  • Construction spending May

Tue July 3rd

Wed July 4th

  • None scheduled- Independence Day

Thu July 5th

  • Weekly jobless claims through 6/30
  • ADP employment June
  • Markit services PMI (final) June
  • ISM non-manufacturing index June
  • FOMC minutes

Fri July 6th

  • Nonfarm payrolls
  • Unemployment rate June
  • Average hourly earnings June

For the week, the S&P 500 moved down by 1.33% for a year-to-date return of 1.67%

Summary

IBD: Uptrend under pressure

GMI: 1/6- Defensive signal since market close of June 28, 2018

BCI: Using an equal number of in-the-money and out-of-the-money strikes. Tariffs a concern.

WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US

The 6-month charts point to a neutral tone. In the past six months, the S&P 500 was up 1% while the VIX (16.00) moved up by 40%.

Wishing you much success,

Alan and the BCI team

 

 



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