The main reason for the early exercise of our covered call writing options relates to corporate dividends, states Alan Ellman of The Blue Collar Investor.

The key date to be aware of is the ex-dividend date. This article will clarify and define the dates related to corporate dividends and also discuss an anomaly related to special dividends.

Early Exercise of Our Covered Call Options

Before definitions are presented, here is the main takeaway of this article:

Shareholders are owed the dividend if they are determined to be shareholders on the record date. An investor would need to own shares on the date prior to the ex-date in order to be (or become) a shareholder of record on the record date (usually the following day). Since the exercise of a call option results in the purchase of shares on the exercise date, it is not uncommon to witness in-the-money call options being exercised on the day prior to the ex-date.

Dividend Date Definitions

1. Declaration Date

The declaration date is the day that the company declares that it will pay a dividend. With this declaration, the company announces how much it will pay, the ex-dividend date, and the payment date. The declaration date is sometimes called the “announcement date” and most reliable dividend-paying companies keep to a regular declaration schedule.

2. Ex-dividend Date

As of the ex-dividend date, buyers of this stock will no longer be entitled to receive the declared dividend and the stock is said to thereafter trade “ex-dividend” (without the dividend). In other words, shares must be owned prior to the ex-date. Before trading opens on the ex-dividend date, the exchange marks down the share price by the amount of the declared dividend.

As an example, BCI, Inc. declares a $0.50 dividend with an ex-dividend date of November tenth. Anybody who buys the shares on the seventh, eighth, or ninth—or any date prior to the tenth—will receive that dividend. When the stock opens on the tenth, it will be adjusted down by $0.50 from the ninth’s closing price. Anybody who buys on the tenth or thereafter will not be entitled to receive that dividend.

As long as a stock is purchased prior to the ex-dividend date, we can then sell the stock any time on or after the ex-dividend date and still receive the dividend. A common misconception is that investors need to hold the stock through the record date or payment date.

Ex-dividend dates are, therefore, the most important date to consider whenever buying a dividend-paying stock.

3. Record Date

The record date is simply the date when the company looks at its ledger and determines to whom they send the dividend checks (“the holders of record”). The record date is always the next business day after the ex-dividend date. This date is unimportant for dividend investors since eligibility is determined solely by the ex-dividend date.

4. Payment Date

The payment date (or “pay date”) is the date on which a company actually pays out its dividend. Generally speaking, this date falls about two weeks to one month after the ex-dividend date.

Location of Ex-dividend Date Data in Our Premium Stock Reports

BCI Premium Report Ex-Dividend Date Location

Why Do Special One-Time Dividends Sometimes Have Ex-dividend Dates After the Pay Date?

What are special dividends?

Special dividends are extraordinary one-time dividends paid by a firm, often following quarters where profits are exceptionally high, or where a firm sells a division or otherwise raises a substantial amount of unneeded cash. Special dividends are a way of returning money to investors directly, often in place of a share buyback.

Why reverse pay date and ex-date?

Firms sometimes do this so that the stock’s price is not unfairly compromised. In particular, if the special dividend is a large fraction of the overall share price, then if a stock is sold to a buyer after the ex-dividend date, but before the pay date, then the seller is entitled to the dividend, but has not received it. This means the seller is in the position of having to collect the dividend from the buyer in the future. For large special dividends, these issues can be avoided by having the payment occur before the ex-dividend date.

Significance to dividend capture investors

Having the payment date ahead of the ex-dividend date does not fundamentally change the economics of the dividend. The stock price is still adjusted on the payment date, and that means shareholders may be able to benefit from buying the stock ahead of the dividend if the stock’s price does not fall by the same amount as the dividend. Investors need to ensure they do not sell the stock until after the ex-dividend date. If they do, they might have to pay the dividend to the buyer of the security. The lesson for investors here is to pay careful attention to dates when trying to capture special one-time dividend payments.

Learn more about Alan Ellman on the Blue Collar Investor Website.