Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20
China Under Reporting Coronavirus COVID-19 Infections, Africa and South America Hidden Outbreaks - 12th Feb 20
Will USD X Decline About to Trigger Precious Metals Rally - 12th Feb 20
Copper Market is a Coiled Spring - 12th Feb 20
Dow Theory Stock Market Warning from the Utilities Index - 12th Feb 20
How to Get Virgin Media Engineers to FIX Hub 3.0 Problems and NOT BS Customers - 12th Feb 20
China Under Reporting Coronavirus COVID-19 Infections by 66% Due to Capacity Constraints - 12th Feb 20
Is Coronavirus the Black Swan That Takes Gold To-Da-Moon? - 12th Feb 20
Stock Market 2020 – A Close Look At What To Expect - 12th Feb 20
IBM AI Mega-trend Tech Stocks Investing 2020 - 11th Feb 20
The US Dollar’s Subtle Message for Gold - 11th Feb 20
What All To Do Before Opening A Bank Account For Your Business - 11th Feb 20
How and When to Enter Day Trades & Swing Trade For Maximum Gains - 11th Feb 20
The Great Stock Market Dichotomy - 11th Feb 20
Stock Market Sector Rotation Should Peak Within 60+ Days – Part II - 11th Feb 20
CoronaVirus Pandemic Stocks Bear Market Risk 2020? - Video - 11th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Using Traded Options to Gauge the Safety of Dividend Payments

InvestorEducation / Dividends Dec 05, 2008 - 07:40 AM GMT

By: Money_and_Markets

InvestorEducation

Best Financial Markets Analysis ArticleNilus Mattive writes: Over the past few weeks, I've told you about some dividend bright spots — companies and sectors where payments continue to rise despite the weakening economy.

But I've also told you that many dividends have been cut or suspended. And many more are likely in jeopardy right now, especially as the “now-official” recession deepens.


So the natural question becomes, “How safe are your dividends?

As I recently showed my Dividend Superstars subscribers, there are plenty of ways to determine the health of a company's future payments — including fundamental measures like cash flows, profits, and payout ratios.

And there is also an interesting way to see what a group of very savvy investors think about a company's future dividends.

It doesn't get any play in mainstream investing columns, but it's a very cool little analysis technique that you can do relatively quickly. That's why I want to tell you about it today …

What Options Investors Can Teach You About Dividends

Options contracts give investors the right to buy (call options) or sell (put options) a given security at a predetermined price (the strike price). Just like insurance policies, these contracts also have predetermined timeframes.

Institutions and other professional investors use options to hedge positions in their portfolios and as pure profit plays. So do savvy individual investors.

There are a lot of variables that factor into an options' price — especially the movements of the underlying security and the time remaining on the contract. Complicated mathematical formulas have been created to help determine the fair value of an option at any given time.

Options traders use complicated formulas to determine fair prices.
Options traders use complicated formulas to determine fair prices.

Collectively, a lot of analysis is working behind the scenes to make sure options prices reflect every possible outcome. And, yes, even dividends factor into the equation!

So by comparing similar puts and calls for the same underlying stock — known as put-call parity — you can actually see whether options investors think the company is going to pay a dividend (either regular or special) during a specific timeframe.

Here's how it works:

Step #1. Pick a put and a call for the same stock, making sure they have the same strike prices and expiration dates.

Step #2. Subtract the put's value from the call's value.

Step #3. Take the result and add it to the strike price.

Step #4. Now subtract that number from the current share price.

What you're left with is roughly the anticipated dividend payments over the life of those options.

Here's a real-world example:

A few months ago, IBM's stock was trading at 92.51 a share. A January 2009 call with a strike of 100 was going for 4.50. And the same put was going for 13.30.

So, subtracting the put from the call would leave you with -8.8.

Adding that to the strike price of 100 would give you 91.2.

And subtracting that from the current share price of 92.51 leaves you with 1.31.

In other words, the options market was expecting $1.31 in dividends from IBM through January.

Now, by no means is this an exact science. Plenty of other market factors can contribute to the 1.31 discrepancy, too. But when the difference is relatively large between similar puts and calls on the same dividend stock, you can safely assume that options investors are expecting some kind of payment.

And you can take your analysis one step further by looking at a given company's recent dividend history to determine if the number is in line with regular quarterly payments or if it might reflect a special dividend as well.

The best part is that you no longer need any kind of fancy subscription or trading platform to get options pricing.

Major financial websites like Yahoo Finance have all the information you'll need to do this simple put-call parity analysis.

From the main page, pull up a quote on your favorite stock, and then click on “options” on the left-hand navigation bar. You'll see a whole list of options prices.

From there, all you have to do it match up a pair of puts and calls and follow the math above. It's that easy! Just remember to use options that have the same strike price and expiration dates.

Best wishes,

Nilus

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules