AAPL – Are Options Telling Us No Dividend?

We get questions at Option Pit on a wide range of topics related to options. After all, that is part of what we are here for. After the giant earnings release in AAPL last week, I thought it fitting to ponder if AAPL will payout some of that largesse they have squirreled away. Maybe before looking at what the actual markets think, let’s examine the rule for dividends.

First- Call values do not like dividends and put values do. A dividend increase will decrease call values and increase put values.

Second- A special one-time large dividend will not change the value of an option. Why? Because the OCC changed the rules, and the option strikes are adjusted down to reflect the dividend value. The price threshold is $0.125 per contract (an eighth in the old fraction days) for the special dividend. This is colloquially known as the Microsoft rule but more on that later.

Third- A company announcing a regular dividend can affect option prices, since it is not “special".  Although the OCC, ultimately, has discretion over all these decisions. For more information go to, http://www.optionsclearing.com/components/docs/market-data/infomemos/2009/jan/25361.pdf)

The “Microsoft Rule” came about after MSFT did the unthinkable in 2004 and declared a $3.00 special dividend. The OCC ruled on adjustments to ETF’s even though they did not meet the “10% Rule” at the time. The OCC has since mostly decided to protect option holders from getting hurt on odd dividends (that means adjusting strikes so there is no net option price effect), and that is the current trend. For MSFT, the name has not done much since they started paying dividends. A long term investor has done ok, if you bought the dips and reinvested dividends, but MSFT really has not done much stockwise since 2004. Buying AAPL in 2004, of course, is a different story. I am not sure paying dividends is great sign for growth.

As far as the option market, the AAPL Apr 455 combo (call minus put) is priced at .13 over parity (this takes the cost of carry into account), which pretty much means the current option market is pricing the chance of a dividend stream at 0. The near brush with death in the 1990’s probably instilled a need for cash at AAPL, as they had to go raise equity from MSFT. For now, the need for that is pretty slim.

Here is an idea- AAPL should just go buy Greece and manage the country themselves and make it a giant iStore. Think of the rally! Call holders fear not in AAPL, just enjoy the ride. The implied volatility is starting to creep up again.

Andrew Givoinazzi and Mark Sebastian