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The Buzz: Overview/highlights for advisors from the RMC. Are advisors genuinely interesting in volatility products such as ETN, VIX ETPs, etc.? The one-year anniversary of mini options is upcoming, what’s the feedback from this product? What is the panels take on the most recent Goldman-Sachs study?
Listener Mail: Stock Replacement Using American-Style Calls
Question from Greg S. -????? I am looking for some advice from an experienced options professional regarding stock replacement using American-style calls. Really the question comes down to- for a higher dividend yielding stock, should I be buying a LEAP or rolling out approximately every three months after exercising very close to expiration and capturing each dividend? ?I get that the dividend lowers the price I pay the longer dated the options are, but does not reflect as much as if the options were available as European-style. It seems that if the dividend yield is high enough, the American style cannot fully compensate the option holder for the missed dividends as the value cannot drop below intrinsic value. Does this call for the shorter term options to capture each dividend? The caveat seems to be that the roll out should cost more extrinsic value on ex-dividend. Since I have a buy-and-hold objective, euro-style or warrants would be ideal to avoid transaction costs, but again, not available. So far, I have been rolling an ITM call option position on a relatively high dividend yielding (5-7%) stock I have wanted concentrated exposure in as part of my overall portfolio but limited risk. ?It makes regular scheduled quarterly dividend payments and the timing of the annual increases is known to occur in Q1 each year. Well just yesterday (day before ex-div for my stock), I figured I would skip the dividend capture and roll out the May contract to the August one cheaper than I could today because today it trades ex-dividend. ?I confirmed this using the CBOE calculator, holding price constant. ?It showed the time value paid to roll should have been more today due to trading without the dividend vs. yesterday. ?Though just eyeing the bid x ask spread it didn’t appear to do so by much and implied volatility looked to be the same.”