 Hey everyone, Lee Lowell here, smartoptionsower.com. Today, hey, I got a special midweek video here for everyone. It's today's Wednesday, August 4th, 2021. Listen, I got a couple of questions this week about Apple's current dividend. Apple declared a dividend a couple of days ago that goes ex-dividend date on Friday, August 5th, which is, no, I'm sorry, this weekend, August 6th. Let me check the date here real quick. So yes, so Friday, August 6th and two days from now is the ex-dividend date for Apple's dividend. So, and people are selling covered calls on these things on Apple. So there's a relationship between selling covered calls and being aware of the dividend that a company reports. So this special video that I'm making today is specifically about Apple, but it can apply to any company that has a dividend coming up. And if you're currently a call option seller, as a naked call option seller, or selling covered calls, specifically covered calls. So I wanna go over this little video and make you aware of what could happen if you're holding a covered call that you've sold, a short covered call while a company declares a dividend. And you could be in for a surprise, something that you didn't know before, if you've never really sold covered calls before I want you to be aware of this situation. So let's jump right in and talk about this. So the lesson here is selling covered calls and dividend dates. It's very important to be aware of when a company is paying out a dividend, but specifically the ex-dividend date. So I just want you to make sure you're reading these things. If you're a seller of call options, whether that's covered calls or naked calls, you could be assigned early on those covered calls before you ever thought that you could be assigned. And the kicker is that you'll have to pay the dividend to the stockholder. So let's jump back for a second and just make sure we're all on the same page. A stockholder will receive a dividend from the company when they pay out the dividend. A call option buyer or a call option holder is not privy to those dividends. So if you're a call option buyer and a company declares a dividend, you're not gonna receive those dividends unless you are a shareholder. So what call option buyers do, if it's beneficial, they will exercise those call options early, which turns their call options into actual shares of stock. So then they become actual shareholders and then they can receive the dividends. That's what happens. That's what a lot of call option buyers can do. They can exercise their options early if it's beneficial to do so. And I will show you what makes it beneficial. So I want everyone to understand that if you're a call option seller, cover calls, you need to be aware of this. Now, the X dividend date is probably the most important date here. The X dividend date comes before the actual dividend is paid. The X dividend date is the cutoff date where you have to be shareholders in the company, which actually you have to be an owner of those shares the day before the X dividend date. So let's talk about Apple here for a second. Apple's got a dividend coming up and they go X dividend date on Friday, this Friday, August 6th. So you have to be a shareholder on record before August 6th. So that means August 5th. Basically, you have to have shares of Apple in your account by the end of trading on August 5th in order to receive that dividend. Okay, so any call option buyer that is holding an in the money call option could exercise that option early before August 6th to take ownership of the shares and then to receive the dividend. Now, if you're the call option seller, you may get assigned early and you'll have to pay out the dividend to the shareholders if you don't take action on your short call. So let's run down what you can do on both sides of the transaction to make sure that you're doing it properly. Now, Apple's dividend is 22 cents a share. That's what they've declared. So the call option always consists of or any option consists of 100 shares of stock. So in that case, it'll be $22 for every call option that is held. One call option is 100 shares. So we're talking 22 actual dollars that are on the line here that a call option buyer would exercise their shares just to receive those $22 for every 100 shares that they own. So in this case, if a call option buyer and hence the person on the other side, the call option seller is holding a in the money call option, then they have to decide if it's worth it for them to exercise that call option early to capture the dividend. Now, what will make the person or the call option buyer decide that it's worth it for them to exercise that call option? Well, you have to compare the size of the dividend which is 22 cents versus the time premium that's left in that option contract, okay? So here's what I'm talking about. What's the tipping point in deciding to exercise early? If the dividend payout is greater than the time value of the option then assignment will happen or exercise will happen. Now, some of you may be thinking, well, what's time value? I don't understand what you're talking about, Lee. Can you explain what time value is? Yes, every option contract, I should say every in the money option contract is consists of the options price consists of intrinsic value and extrinsic value. That extrinsic value is what's called the time premium and I'll go over some option examples and I'll show you. So as an option gets closer to expiration that that option is in the money, the time value is there's a little bit of time value left that if you exercise that option and turn it into shares of stock, you will forgo as a profit that extra time value, okay? So some cases it's better to just sell the call option to capture that time value. When you sell an option, you'll capture that time value. When you exercise an option, you will forgo you will give up that extra time value and the time value could be a lot of money. So you have to understand what you're doing. You have to understand how much time value is left in that option, okay? So in Apple's case, the Apple's dividend is 22 cents a share. Is that 22 cents greater or smaller than what's left in the time value of whatever in the money option you're currently holding, okay? And an easy way to understand or see how much time value is left is you look in the last line right here, you look at the corresponding put options price of that same strike, okay? So let me pull up the Apple options here and let's go over some numbers so you'll understand whether it's worthy of you exercising and in the money option early to capture the dividend and we'll talk about what the time value is. So here's Apple options. We got call options over here, put options on the right. So these are Apple options that actually expire on this Friday, August 6th, 2021 which is the ex-dividend date but you'd have to have the shares in your account before that, August 5th. So that's actually tomorrow. Today's Wednesday, August 4th, tomorrow's August 5th, 2021. So we're very timely here but let's take a look at some Apple options just to see what we're talking about. Now Apple's currently trading at $146.75 right here and let's take a quick look at some at-the-money options. Now the 146 calls inputs, the 146 calls, let's look at those. If Apple was to expire today at $146.76, the 146 calls would be in the money by 74 cents right now, okay? You take the stock price and you subtract the call so 146.75 minus 146 equals 75 cents. On expiration day, these 146 calls should be worth no more than 75 cents per contract but as you can see here, they're worth $1.28, $1.29 which is greater than the 75 cents of intrinsic value. Intrinsic value is what you get when you subtract the strike price from the stock price. Right now, this 146 call will be worth 80 cents on expiration day but we're not at expiration yet, we've got two days left so these 146 calls are worth $1.28, $1.29. So why is it worth more than 80 cents? If that's all it's worth on expiration day? Well, that's because you still have some time left. You have two days left and in order to figure out what that time value is, like I said, you look at the corresponding put option of the same strike. The put option's worth 67 or 68 cents. That is the time value. That is the extrinsic value. So what you would do is obviously this call option, the 146 calls has intrinsic value of 80 cents a contract plus another 67, 68 cents. You add those two together and you get its current value of $1.32, $1.31, whatever. So we're talking about is it smart to exercise and in the money option right before a dividend payment. Now Apple's dividend is 22 cents a share. Let's just say you had purchased the 135 calls a month or two ago, hoping that Apple would go up in price. And on the other side, you have the call option seller who has some Apple shares themselves but they wanted to sell some covered calls bringing some extra cash. So you sold the 135 call strike at the time. Maybe Apple was trading at $135 at the time. So you figured I'll sell the at the money 135 calls. Well, you can see Apple has rallied up to $1.46, 86 right now. So these 135 calls are in the money by almost $12 a share. And if you're the call option holder, you need to decide now is it worth it for me to exercise these call options and take ownership of the shares so I can get the 22 cent dividend that Apple will be paying out. And I have to exercise these call options by tomorrow, I guess, August 5th. And it also depends on how fast your broker turns around and actually turns them into shares of stock. So you need to talk with your broker about that. I don't wanna give any wrong information but the shares need to be in your account by end of day August 5th, which is tomorrow. So you have these 135 calls. So what you do is you see how much time value was left by looking at the corresponding put option price which is one or two cents a contract. So there's like no time value left whatsoever. This call option is basically all intrinsic value. So you're seeing that well 22 cents dividend is greater than two cents. So that means it will be smart to exercise these call options turn them into shares of stock and I'll capture the 22 cent dividend. Now the person on the other side, the call option seller that you sold these covered calls, Apple's risen high. So you know that you're going to get assigned at some point but the key here is that if you get assigned you're on the hook to pay out the $22 a share 22 cents per share on these call options. So if you sold one call option and you get assigned early before you realize what's going on not only are you gonna now have short 100 shares of Apple in your account at $135 a share which you knew when you sold the covered calls but now you're gonna have to pay an extra $22 out of your pocket to the option holder. This anonymous other person, your broker will debit your account $22 for that call option that you sold. Now if you sold 10 call options, you're out $220. So you need to be very aware of how much time value is left in these call options if you're a covered call seller. Now the 140 calls are in the money as well and that time premiums worth, time value is worth five cents. So that's still less than 22 cents. You're at risk of being assigned early. So we need to see which options are greater than 22 cents at the moment. So it looks like the 145 calls here, the 145 puts are still worth about 35 cents. So you're okay but you're getting close to that 22 cent mark that you might need to take action. Now what kind of action should you take if you're the call option seller if you're a covered call seller? Well, if you don't want to pay the dividend payout, you have to get out of your call. You have to get out of that short call. How do you do that? Well, you gotta buy the call option back that you sold or you roll your short call out to a further expiration date. Let's take a look August 20th which is the monthly expiration. Now the 135 calls here, the puts are 22, 27 cent, 28 cent ass. So that's very close to the dividend payment as well. So anything that's deep in the money here, apples trading at 147, all these in the money call strikes are you have to check the time value. Now, if you sold the 140 calls, the 140 puts have a extrinsic or time premium of 60 cents. So you're safe on these. Okay, so if you're holding these August 20th and you sold the 140 covered calls, you're still safe because the time premium of 60 cents is greater than the dividend of 22 cents. So you are not in any danger of being assigned early unless you've got a call option buyer who just doesn't understand the game and they exercise their options early which would be detrimental to them because they'll forego the 60 cent time premium. They'll get the dividend of 22 cents but they'll lose out on the 60 cents here. So they'll actually lose out on 38, 39 cent of extra profit. Okay, so if you've sold any covered calls and they happen to be in the money right now and the company is about to declare or is ready to declare a dividend, you need to be aware of the ex-dividend date of that company. So if you're holding a covered call that's in the money, you need to look at the whatever time premium is left and compare it to the dividend price. And then you'll know whether you need to take action. And those two action plays are you either buy those covered calls back and pay whatever they're worth or you roll the option, meaning you buy your covered call option back and then you sell a further out expiration date covered call if you still want to remain in the trade. Okay, so it's very important. I got some questions about that this week. So I hope that answers it. Let's go back to my cheat sheet here. So understand that if you sell covered calls and the company is about to announce an earnings and that option is in the money, make sure that whatever time premium is left is greater than whatever the dividend payment is for that stock. Okay, so just be aware. Now I had a situation that I got taken by surprise. This was just me being lazy. I had to pay out the dividend on, I had a call spread that I had sold that I forgot about the dividend being paid out and I was exercised early or signed early and I had to pay out the dividend a couple of hundred dollars which I was not happy about. I had forgotten about it. So be aware any covered call that you sell or naked call that you sell, understand when the company announces dividends because you may be on the hook to shell out more money than you thought you'll have to pay for those dividends. All right, so that's the special edition of the midweek special edition of selling covered calls and being aware of dividend dates. I hope this has been helpful for some of you. If so, please give me a thumbs up on this YouTube video, leave me a comment, share your own stories if you wish. Send me an email and I hope this has been helpful. This is Lee Lowell signing off.