Don’t let a faulty altimeter lead you to believe Boeing Co (NYSE:BA) is in need of repair. Any stray measurements in Boeing stock’s share price on Wednesday were tied to a pending dividend payment — and one that has already paid nice dividends to some options traders. Let me explain.
Shares of Boeing have been flying high in 2017 after hitting record highs following the aircraft manufacturer’s earnings beat late last month. But in Wednesday’s session, BA stock may have appeared to have had a slight crack in its fuselage; pardon the pun.
Houston, Boeing Has a Problem?
At a share price of $164.08 and depending on your trading vendor, BA stock was off either $1 or 0.61% or a more eyebrow raising -$2.42 or -1.45%.
The $1.42 difference between the two readings in Boeing shares is tied to the stock going ex-dividend Wednesday, with a cash payment of $1.42 scheduled for March 3.
Bearing this in mind, trade vendors who recognize the ex-date will show BA stock as trading lower by the less-significant 0.61%. Any chart or quote platforms that erroneously fail to account for the ex-date will indicate Boeing has declined by a larger 1.45%.
For BA stock investors who were long or purchased shares by Tuesday’s close, Wednesday’s minor damage is reflected by the more modest 0.61% dip, as $1.42 will be paid back to shareholders next month to dampen the otherwise larger 1.45% decline in Boeing.
What’s the point? Dividends aren’t a free lunch, as the money distributed is taken out of the share price of the stock. If Wednesday wasn’t an ex-date in Boeing, BA stock would be trading $1.42 higher at $165.50 vs. $164.08 — bottom-line.
For the proverbial free lunch, you’d have to look at Tuesday’s heavy volume options trading in BA stock tied to ‘dividend play’ activity, which looks to arbitrage the future payout with an immediate overnight payoff.
BA Stock Dividend Play Strategy
To illustrate how this might be accomplished, we can look at the BA stock Feb $155 call, as roughly $14,200 in profits was distributed to one or more options traders today due to the ex-dividend.
In Tuesday’s session, more than 5,600 of the deep in-the-money calls traded. The heavy tally compares to open interest at the time of roughly 2,500. With the February $155 put trading for 10 cents, part of the unusual volume may have been in the form of traders executing buy-writes or the equivalent of a synthetic short put.
But the traders responsible for this activity weren’t looking to establish buy-writes for 10 cents when buying BA stock and selling the February $155 call during Tuesday’s session. Nope.
What these BA stock dividend traders were really after was hoping a long $155 call holder within the pool of existing open interest of 2,500 failed to exercise the contract last night. If that were to occur, those traders would in effect, have shorted (synthetically) the February $155 put worth a measly 10 cents for a much more meaningful $1.42 for each buy-write still in inventory.
How it works is Tuesday’s dividend play traders would effectively wash on their BA stock position as the decline in share price attributed to the ex-date will be paid next month. The profit generator in this transaction is the short call portion of the buy-write, which wasn’t assigned.
Call options don’t receive dividends, so a contract like the deep $155 call essentially loses the full value of the pending dividend. It’s why an investor holding this contract would be greatly motivated to exercise the call and convert the position into BA stock before the ex-dividend.
As it stands, of the 2,500 in open interest roughly 2,400 call holders did elect to exercise their call into BA stock last night in order to receive the upcoming dividend. We know this based on Wednesday’s open interest just shy of 100 contracts.
We also know that because of the failure of those contracts to convert, one or more traders short the call — and maybe part of a buy-write positioning described; already profited to the collective tune of around $14,200.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.