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1. Should the option prices change when a company

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surprisingly eliminates its dividend but...
1. Should the option prices change when a company surprisingly eliminates its dividend but its share price stays the same?2. Give two reasons why "short interest rebate" would be a negative interest rate.
Submitted: 10 months ago.Category: Finance
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Customer reply replied 10 months ago
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11/17/2017
Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 10 months ago
Chad EA, CDFA®, CFP®
Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional
Category: Finance
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Welcome to JustAnswer. My name is ***** ***** I will be able to assist you today.

Stocks generally fall by the amount of the dividend payment on the ex dividend date. This impacts the pricing of options. Call options are less expensive leading up to the ex-dividend date because of the expected fall in the price of the underlying stock. At the same time, the price of put options increases due to the same expected drop.

____

Both call and put options are impacted by the ex-dividend rate.

____

Short Sale Rebate Fee

When you borrow money from a lending institution, you agree to pay interest on the loan based on certain conditions such as the loan amount, availability, etc. Similarly, when you borrow shares of a stock, you may be charged interest based on the underlying lending conditions of the security in the short sale - primarily the availability of shares. This fee is referred to as the short sale rebate fee

____

The availability and perceived volatility of shares also factors into the settlement of a short sale. Stocks that are hard to borrow have a higher likelihood of being unavailable on the settlement date and incurring a forced buy-in throughout the time you hold the short position

___

The fees are either ETB (Easy to borrow) or HTB (Hard to borrow).

When trading HTB stock, brokers may charge an additional % of interest (also called negative rebate,)

Therefore, two reasons why you would be charged an additional amount of interest would be based on the availability of the stock and the perceived trading volatility of the stock.

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Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 10 months ago

If the company eliminates the dividend payment the option price will also change because the dividend is typically factored into the original pricing of the option premium.

I would be happy to answer any follow up questions you may have.

At the conclusion of our conversation please take a moment to accept the answer by rating the answer with three stars or more. Thank you!
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Customer reply replied 10 months ago
even eliminates its dividend, the option prices still changed?
Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 10 months ago

Yes, because when the option was priced the dividend was priced in.

__

So when the dividend is eliminated, the option price changes to reflect the change in dividend.

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Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 10 months ago

Also when the dividend is eliminated the price of the stock won't drop as it would if a dividend was issued.

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Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 10 months ago

Yes, because when the option was priced the dividend was priced in.

priced meaning, the option price takes into account that the stock will issue a dividend. When this no longer happens the option price changes.

Was I able to clarify your question?

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Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 10 months ago

Hello.

If you have no further questions please take a moment to accept the answer so I may be compensated by JustAnswer for my work!

Thank you

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Financial Professional: Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional replied 10 months ago
I would be happy to answer any follow up questions you may have. At the conclusion of our conversation please take a moment to accept the answer by rating the answer with three stars or more. A positive rating of five stars is always appreciated. Thank you!
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