Dear Diary ...

[Samantha Stephens]

Tell me about it! I traded stocks for 3 years ... alone ... until I found this site in November. I wish I had found it sooner. I'm convinced these are the funniest, smartest people I will ever hope to meet. Every time I log on ... somebody dimples my brain.
-Sam

[wrangler]

Great
Now don't stay gone so long and keep posting about options so I can learn what they're about.
Have a great trading day

[Quasi]

Hi Sam,  glad to hear all that computer stuff is more or less fixed.

I've got an options question for ya, hope you can help.

Watching this $40 stock, GMR, well last night they announce earnings and rev's fall considerably, however they also announce that they have decided to borrow some money and pay shareholders a div of $15 later in March.  Not sure why they are doing all this ??

Anyway I'm thinking not much good buying the stock here, might go up a bit in order to get the $15, but if you hold for that div then as soon as it goes ex-div the stock will usually drop about $15, so net from here is about zero with some risk.  Now some say you could short it, but of course being short you would have to pay out the $15 to the guy you borrowed the stock from to short, again about net zero with risk.  So I'm thinking buy the $40 May puts, as the options aren't liable for dividends and a very good chance this one will be under $40 when it goes ex-div. then sell the puts for a profit.  (So I bought some May $40 put's today)

However after doing a little digging tonight, I find that in general terms I was correct.  But then the fine print about "special" divs, or div's over 10% of the share price.  Seems that the options clearing board can do some kind of adjustment, usually to the strike price.  Although they can also collect cash on settlement from the appropriate option side.  So in this case I believe the strikes will be adjusted lower by $15 on ex-div day and probably a notice will be posted on the CBOE under adjustments and my $40 puts will become $25 puts, not looking as good a deal now.

All in all I find this a bit confusing, have you been thru this stuff before and can you give it too me in layperson terms if possible?  The basic PR is shown below along with  the put call action today.  I'm not sure if the price variations on the options today are due to the 9% rise in the SP or due to anticipation of the strikes being changed.  And what will the impact be on the day when the strikes actually change or is that priced in now?

Anyway a very interesting situation for learning more about options, usually I only dabble in QQQQ options, pretty simple compared to this.

thanks in advance

Quasi


AP
General Maritime Rides the Wave
Thursday February 22, 12:18 pm ET
Shares of General Maritime Surge on Word of Special Dividend

NEW YORK (AP) -- Shares of General Maritime Corp., which owns and operates crude oil tankers, rose sharply on Thursday, a day after the company said it will pay a special cash dividend of $15 per share.

Shares of General Maritime raced up to a new 52-week high of $44.34, before sliding back to $43.56, up $3.85 or 9.7 percent, in midday trading on the New York Stock Exchange.

The company said after Wednesday's market close that its fourth-quarter earnings tumbled to $22.4 million, or 71 cents per share. Revenue fell to $66.6 million from $156.4 million.

But the company also said it will pay a $15 dividend on or about March 23 to shareholders of record as of March 9.

Jordan Alliger, an analyst at Deutsche Bank Securities, said he likes the idea of management creating shareholder value through the special dividend, but added that it could also signal a shift in the company's growth strategy.

"This large payout could also be indicative that the potential for large-sized acquisitions is for the moment a challenge to achieve, we would think due to what could be peak type asset values in the industry," Alliger said in a note to clients. He rates General Maritime at "Sell."

Phillippe Lanier, an analyst at Banc of America Securities, noted that General Maritime plans to finance the payout with debt, which would raise its interest expense and could reduce annual earnings by up to 20 percent, or 80 cents per share. He also warned that any run-up in the company's stock on Thursday could be short-lived.

"We would caution that there is a material risk that it could fall in value to, or below, $30/share once it goes ex-dividend later this month," Lanier said in a note to investors.

Lanier rates General Maritime "Neutral."

[Samantha Stephens]

Hi Quasi,
I think you need a new plan ... and quickly. Your March options will expire Friday March 16th ... so they won't last until the dividend planned for "on or about" March 23rd.

You're spot on with what will happen after they pay out the dividend. The night before ... let's say the stock is at $40 ... you have the $40 put.... you'll go to bed and wake up the next day and the stock will be at $25 ... and voila ... you now own the $25 put (adj). Everyone will get adjusted down. I know what you were thinking ... I had the same idea when Microsoft was going to pay out the $3 dividend. D'Oh. I couldn't figure out why nobody else was taking advantage of the $3 handout ... in your case that would be a $15 handout... the market NEVER gives away free money. hahahahahaha

So to answer your question "is it built in to the options" ... essentially ... yes. If they didn't do the adjusting thing, then your option would have cost you $15.70 instead of $.70 to buy that same put.

I think the "tendency" is for stocks to run up up into splits and dividends and such. Even though ... everyone knows that you really don't "get" anything out of either. So if you think the stock will run up ... then I think you're on the wrong side of the trade with your puts.

Now ... if the news settles a bit on the dividend front ... and people fixate on the bad earnings ... which I have to say ... are really bad. Like so bad are you sure the company is not going under? Then short term your puts might just work. But I wouldn't consider holding them for long at all. They're relatively close to expiration, you're holding the wrong month, and if you hang on too long, the time (Theta) will get eaten up. Also ... everything that's unknown is now known ... unless of course they announce dissolution or something drastic.

You need an exit strategy. Set a target, be that a dollar value on the stock or option ... or x increase/decrease in IV, theta or delta.... tomorrow by market close ... something.  If you hit whatever target you set. Good or bad ... you need to get out. You didn't give yourself much time to be right.

I see it got a nice pop today ... that's not good for you're puts ... but maybe there will be some profit taking tomorrow by people who are not interested in the dividend (cause you really get nothing... well except for a tax bill...) and you can catch a nice selloff.

Maybe someone who can better read the candlestick tea leaves, find support and resistance ... or have a better feel for what the stock is supposed to do from her to March 23rd. I'm not very good at that. For your sake, I hope it takes a major tumble tomorrow and you're able to just ....get out.

Good luck to you!!!!
-Sam

[Quasi]

Hi Quasi,
I think you need a new plan ... and quickly. Your March options will expire Friday March 16th ... so they won't last until the dividend planned for "on or about" March 23rd.

Hi Sam

Thanks for your great input, this will be a great learning experience, I "applaud" you.  I always learn more when I get really interested in strange new things.

However its not as bad as you thought, the pay out is around March 23rd, for share holders of record on March 9th, so it will go ex-div on March 7th.  So in theory the March puts (expiry on the 16th) would be close but OK, if the big move happens as planned and you sell right away.  Now I considered all this and decided that the risk of time erosion was just too great, and if the ex-div date was pushed back just a couple of days you would be up the creek.  So I bought the May $40 puts for 90 cents after they had already tanked from the previous day at $2.90.

So all in all I still have some time to see how things go, will be watching closely.  I did anticipate a little pop in the stock price today but I don't expect it to really continue.  The puts did tank today but I bought mine close to the high of the day in the stock price so it was just after the puts had bottomed for the day.

Thanks for all you help.

Quasi

[Quasi]

Hi Sam

I'm still holding those GMR puts, still in the money but it has been a rough week in the markets and I think we'll get a little bounce here before the next wave down.

However its not as bad as you thought, the pay out is around March 23rd, for share holders of record on March 9th, so it will go ex-div on March 7th.  So in theory the March puts (expiry on the 16th) would be close but OK, if the big move happens as planned and you sell right away.  Now I considered all this and decided that the risk of time erosion was just too great, and if the ex-div date was pushed back just a couple of days you would be up the creek.  So I bought the May $40 puts for 90 cents after they had already tanked from the previous day at $2.90.

Well yes I was a little concerned the ex-div date could get moved back a little from the stated March 7 date, so I bought the May Puts.  Well yes indeed NYSE announced Friday that the ex-div date will now be March 26th.  And the Options Clearing Corp just published a bulletin on Fri that the option adjustment will take the form of down $15 in the strike price on March 26.  Very interesting stuff.

Now there are no options at $15 or below, but say there were they can't make a strike of $0 or negative, so I assume they would then opt for a $15 div to be included in the settlement of the option??  Or is there another method for adjustment?

On another subject, David on the 3SOF fast portfolio is starting to dabble in options for the portfolio.  Thus he has created a wave of interest from new investors wanting to get into options.   Since you are our resident expert on options it would be great if you could get involved.  But I guess those discussion should probably take place over on the options forums so we have a record thats easy to look up in the future.  Just thought I'd give you a heads up.

Yes I see David just opened a thread on understanding options for general learning discussions, link as follows.

http://www.3stocksonfire.org/trading/index.php?topic=9085.0;topicseen

thanks
Quasi

[Samantha Stephens]

Excellent about the 3sof guys dabbling in options. And that's very sweet of you to say ... but I would have to defer to David & Ramsburg. Now... we're talking experts! Even if people don't buy/sell options ... I still think they're an incredible indicator. Like the magick lines, candles, pattern and trend analysis. I think they give some really nice insites into the consensus of the market. Well ... and then there's the incredible returns (oh ... and losses) that can be had if you pick the right option.

I've been keeping my eye on your stock/options. I was hoping you're give me an update. I have no clue how they'll handle the $15 options. But it does seem like they'll need to compensate the owner in some way. And I'm so glad you moved your options. I was trying to send you SELL vibes ... and not so subtle hints to get the heck out. hahahHAHAHAHAHA

Thanks for sending the link! Keep me posted on how your trade comes out!
-Samantha

[tokyopua]

Excellent about the 3sof guys dabbling in options. And that's very sweet of you to say ... but I would have to defer to David & Ramsburg. Now... we're talking experts!

Actually Samantha, David admitted to not trading options much.  I think where their expertise comes in is in knowing where a stock might be going, and thus what options to buy.  Currently its mainly puts that are being looked at given the  ,  ,    market lately!

But all the other aspects of options volatility, etc. are areas where I am sure you could provide great input, even if you only cut and paste some of your former posts on the subject into that thread 

[Quasi]

I've been keeping my eye on your stock/options. I was hoping you're give me an update. I have no clue how they'll handle the $15 options. But it does seem like they'll need to compensate the owner in some way. And I'm so glad you moved your options. I was trying to send you SELL vibes ... and not so subtle hints to get the heck out. hahahHAHAHAHAHA.......

Thanks Sam

You were right, but I didn't actually move my options, my original purchase was the May $40 puts for the specific reason that things could change without notice, and they did.  If I'm selling calls I tend to go short time, but buying puts I like to have a little more time.  So I still have a little time, although I have been second guessing myself that I should have just taken the bid at $1.70 a few days ago for an 88% profit, or like you said put in a high ask and see if I get picked off.  Some people got picked off at $2.05 a few days ago.

Markets are a little crazy right now and I think the underlying stock has risen due to the $15 dividend, not the underlying fundamentals of the company, people are looking for safe havens.  So I think I will try to let it ride thru the stock bounce I expect over the next week, then things should start to improve again.  House of cards is rather shaky right now I think, just have to wait for the next wave down.

thanks
Quasi

[Samantha Stephens]

I'm so blond! The March $15 dividend must have been my shiny bright object that I couldn't get past... March ... May ... it all starts with an M. hahahHAHAHAH

You're right about having time. I hope I didn't freak you out. OK ... I'm back on your same page. I was a little lost there... sorry about that. 

This is going to be so interesting to watch...
-Sam