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Everything Options Investors Need to Know About Dividend Poaching

By Ellen Simonson Rosenthal and Jim Gillies - Updated Jun 24, 2021 at 8:52AM

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One aspect of options investing newbies need to know about is "dividend poaching." Analyst Jim Gillies explains what it is and how to avoid it.

For investors interested in getting started with options, the way these instruments work can seem intimidating. For instance, what is "dividend poaching" and when does an investor need to fear it?

In this segment from Motley Fool Live that first aired May 7, Motley Fool Canada analyst Jim Gillies and Fool.com editor/analyst Ellen Bowman discuss this aspect of dividend stock investing with options.

Jim Gillies: Now, I did mention, there is an issue with dividends as well. Potential issue with dividend.

Ellen Bowman: Yes. There's a question on Slido here, I want to make sure. Liquid425 asks, can you talk about dividend poaching on covered calls? Let's get into that a little bit.

Gillies: They're even using the right term, dividend poaching.

Bowman: I know. I feel like this is a friend, a plant in the audience. Thank you.

Gillies: I was going to say I like that. What is Apple's (AAPL -0.23%) dividend?

Bowman: I should know, but I don't. I'm sorry.

Gillies: I think they just raised it actually.

Bowman: They did, yeah.

Gillies: That's their want to do. I think it's now $0.22 a quarter. As my computer stares at me. Yes, it is, $0.22 a quarter. Dividend poaching. By the way, congratulations, Ellen. Today is Apple ex-dividend day. Did you know that?

Bowman: I didn't actually. Like I said, long-term buy-and-hold this whole time.

Gillies: Yeah. I just learned it now as I stare at my other monitor.

Bowman: Well, how should I celebrate? I'll use my iPhone, I guess.

Gillies: [LAUGHTER] So the ex-dividend date is the date on which the shares trade ex-dividend, without the dividend. You want to own the shares to get this next dividend, which is going to get paid on May 13th. To get this next dividend paid by Apple, you had to be a shareholder as of yesterday's market close.

Bowman: Not May 12th. You can buy on May 12th then get the dividend May 13th.

Gillies: Not the next dividend, you'll get the next one, but not this one come. As long as you own Apple's shares as of yesterday's close, you will get this next dividend.

Bowman: Okay. So that is interesting in a covered calls situation or in an options investing situation because that dividend is worth money, and so interested parties come and try to poach it.

Gillies: Well, only in certain circumstances. Again, so we're working with our 145 strike, so we need the stock price. The funny thing about dividends and with Apple dividends, is they tend to pay them every three months, which also lines up with our covered call frequency.

Bowman: Some kind of pattern. I don't know.

Gillies: Since the ex-dividend date for May is about two weeks, as is today, it's two weeks before options expiration, it's probably a good bet that the ex-dividend date for the next dividend, the August dividend, will also probably be about two weeks before our arbitrarily chosen August dates.

Bowman: Okay.

Gillies: What you need to do, first of all, for your stock to potentially be called early, and Fools, why we worry about what we call dividend poaching is, of course, if Ellen has her shares called away, she loses not only the shares, she loses the dividend. The poaching, there's only two circumstances you need to fulfill. The first, as the ex-dividend approaches, stock-price must be above the strike price.

Bowman: To fear poachers, for it to be appealing to poachers.

Gillies: Again, with the stock price of 130, Ellen, you might like someone to call your stock away for the 145 strike, but it ain't going to happen.

Bowman: Well, the dividend is not that high. If it were a $20 dividend per share, then maybe.

Gillies: Yeah, you are perfectly safe. But if we're going into, let's say, the stock is 150 as that date approaches, so that's our first gate. That's our first thing that we trip out and say, OK, I'm now at risk of dividend poaching. Then you need to know when is the ex-dividend date. It'll probably be around, I'm going to go August 5th, August 6th. I don't even know if those are Fridays, but it's probably around there. I think it would be the 6th because I think expiration of the month is the 20th. I can do math, 20 minus 14.

Bowman: Yeah. My brother's wedding party is on the 7th, which is Saturday, so the 6th.

Gillies: Congratulations to Ellen's brother.

Bowman: Thank you, on his behalf.

Gillies: [LAUGHTER] We see the ex-dividend coming up, we look at the stock price, it's above our strike price. Now, I need to check, am I at risk of dividend poaching? The way we determine that is our old friend, intrinsic value and time value again. You calculate the time value. If the stock is, say, 150, and our strike price is 145, 150 minus 145 is $5 intrinsic value. The dividend is $0.22. What is the options trading on that date? Well, if the option's trading at six dollars, that means five dollar is a buck, six dollars minus the five dollars. Don't worry about it. Because as ex-dividend date approaches, if time value exceeds the dividend, you'll be fine if the time value is less than the dividend.

Bowman: That's where that margin comes in for somebody who might want to come in and grab it.

Gillies: They might say, OK, if time value is only say $0.05, I would rather exercise early, burn the time value, because I'll then be an owner of the shares on the ex-dividend date. If I burn five cents in time value but I get a 22 cents dividend, I'm net 17 cents. You might say, "Who cares at 17 cents?" But if I'm a big clearinghouse that's got all these different options, it could add up to real money. You and I might not do it.

Bowman: It's worth somebody's while.

Gillies: It's worth somebody's while. Basically, as ex-dividend date approaches, if time value exceeds the dividend, don't worry about it. If it's less than the dividend, that's when you have a problem, that's when you would do that rolling transaction we talked about, that's when you do that early.

Ellen Simonson Bowman owns shares of Apple. Jim Gillies owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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