One thing about the market is how it never fails to continue to humble Dr. Kris, especially when she starts to think she’s pretty smart. Take the recently declared $4.50 special dividend by OptionsXpress.*
[Special dividends are fairly rare events but companies sitting on a lot of cash have been declaring them this year so that their shareholders won’t be saddled with the tax burden of an increased ordinary dividend next year (now a moot point as just today Congress has agreed to keep the Bush tax cuts for at least the next two years).]
On 11/29, the day of the announcement, the stock jumped from $17 to $18.67 before settling back down to the $17.30 area which is where I bought it. Along with the stock, I purchased the January 15 put for 20 cents that (I thought) would more than amply protect the position. Doing the math, I was guaranteed at least a $2 per share return (11%)— that’s incredible!
There seemed to be no downside to this trade, so why wasn’t everyone and his uncle piling into it? Was I missing something?
I finally found the answer today on the CBOE website where they state in a memorandum that because of the special dividend, all of the listed options strike prices will be lowered by the dividend amount.** Oh-oh. That means in a blink of an eye my fifteen dollar strike shrunk down to a size ten-fifty, a fact my broker neglected to mention when I placed the trade. The real kicker is that my broker is OptionsXpress! Thanks a lot.
Essentially I’m flying without a safety net but I’m not too worried. I don’t think the situation is all that dire. The stock will have to drop to $13 before I start losing money which means busting through several areas of support including a major level at $14. The risk picture will become clearer as the pay date (12/27) approaches.
Well, I’m still looking for that free lunch, but on Wall Street the only way to get it is still the old-fashioned way–illegally.
* This dividend will be paid on December 27th to those on record as of December 13th. The stock goes ex-dividend on December 28th.
** The options strike reductions are also in effect for the following companies that have recently declared a special dividend: IBKR, RLI, STV.