Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
Global Economic Tensions Translate Into Oil Price Volatility - 22nd May 19
The Coming Pension Crisis Is So Big That It’s a Problem for Everyone - 22nd May 19
Crude Oil, Hot Stocks, and Currencies – Markets III - 22nd May 19
The No.1 Energy Stock for 2019 - 22nd May 19
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19
It’s Not Technology but the Fed That Is Taking Away Jobs - 16th May 19
Learn to Protect your Forex Trading Capital - 16th May 19
Gold Ratio Charts Offer The Keys to the Bull Market - 16th May 19
Is Someone Secretly Smashing the Stock Market at Night? - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

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