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Post by kloot on Nov 27, 2012 19:53:40 GMT -8
ALERT: I am considering closing all of my long calls or spreads tomorrow in fear of a large "special" one time dividend that would occur before the close of 2012. Please review my logic and comment. 1. Dividend tax rates appear likely to increase 58% from 15% to 23.8% (20% + 3.8% medicare surcharge). 2. Apple has a massive cash hoard (~$130 per share of which 1/3 is held in the USA). 3. Apple could declare a one time dividend up to ~$43 (1/3 of ~$130 held in US), but probably lower unless they float a bond offering in which the could presumably raise the dividend substantially higher. 4. What will the stock do if they declare this one time dividend? At a minimum, the stock will drop after the dividend is paid (actually ex dividend). 5. If you are long calls they will therefore lose value after the one time dividend is paid (ex dividend). 6. If you are short calls, they will likely be exercised if the call premium on the common shares is lower than the special dividend amount. 7. The nightmare scenario is that your short calls are assigned, creating a short position that if not closed in time will be required to pay the dividend. 8. In any event, if the dividend is substantial and paid before your call expires or before you exercise your long call... You will take some kind of a hit because the Apple common shares will drop after ex dividend date. Do I have this right? Shouldn't all call holders that are exposed be concerned? as Apple II said above, option strikes are adjusted for special (large) dividends. it theoretically should not affect option holders, except for likely adding volatility. notice today on the cnbc whisper of it, stock jumped over $5 in minutes. I would prefer a buyback. but they need to and will do something with that cash eventually. it's stupid to hold 120M in cash earning nothing. and actually last quarter it lost money because of hedging strategies and contributed to the "miss." also IMO, the price to cash ratio is a ridiculous metric that is not causal. what big buyer of the stock would base a purchase on a made-up multiple of cash in the bank? has no direct relationship to current or future earnings. Horace pointed it out as an interesting tidbit.
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Post by mbeauch on Nov 27, 2012 19:56:57 GMT -8
Kloot, Horace actually did a very extensive study on AAPL's price to cash. I will try to dig it up.
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Post by mbeauch on Nov 27, 2012 20:05:45 GMT -8
Nick is at it again. Smart guy, but he has some issues. His worth to me has disappeared. This group has excellent TA and fundamental people, the rest is just noise.
All hail the Queen. ;D
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Post by nkmho on Nov 27, 2012 20:07:30 GMT -8
Regarding assignment risk for a special dividend, there basically is none from what I understand, unlike for a regular dividend. Getting exercised would be a good thing if you have a spread.
Example: Suppose you have a 500/525 call spread and AAPL is at 600, and your 525 is exercised before a special dividend of $10 for instance. So you get put are short shares at $525 and then you payout $10 because you haven't exercised your 500 calls yet, so you've basically sold shares for $515. After the dividend payout, the strikes are lowered by $10, and you are now long 490 calls instead of 500s. So you exercise those, and at that point, you've realized the full width of the spread of $25! ($515-$490).
If it was a regular dividend of $10, you'd lose $10, but in the case of the special dividend, you don't lose the $10 because of the strike adjustment.
Hope that makes sense.
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Deleted
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Post by Deleted on Nov 27, 2012 20:07:50 GMT -8
I've just spent some time at the red carpet festival event for the hobbit premiere here in Wellington - iPhones everywhere!, even Peter Jackson himself was sporting one. Had the odd nutter filming with iPads as well.
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Mav
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Post by Mav on Nov 27, 2012 20:08:28 GMT -8
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Post by jdrizzo89 on Nov 27, 2012 20:11:40 GMT -8
5% jump pushes us close to 620 atleast...
I like what Nick mentioned about following minimal "noise" besides his own thoughts and what is going on with stock/company...
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Post by michelc on Nov 27, 2012 20:12:48 GMT -8
What is the proportion of aapl owner outside te USA? as that increase in dividend only affect US people's it doesn't make sense if the majority of owners are outside USA . Also what is the effect of that taxes on institution? Do they have to pass it along? Just curious Dividends are passed through to mutual fund holders. I know in the US we can't actually buy shares of company's outside of the US, we can buy ADR's. I imagine it works the same way for people outside of the US buying AAPL. With that being said, the overwhelming majority of AAPL shares are held in the US through mutual funds. One fund that I have in Tammy's 401k own 6 million shares of AAPL. That is a large chunk for one MF. Heck, SJ's wife has about 10 million shares if I am not mistaken. (will have to double check) If from Canada and my aapl share are bought directly in my rrsp ( retirement ) plan manage by me, so in my case the dividend will be paid to me and aapl share are mine.
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Post by jeffi on Nov 27, 2012 20:24:44 GMT -8
Just curious, this works well in $5 dividend increments, but what happens if the dividend isn't in a $5 increment? Round off to the nearest $5? Or am I over thinking this? If there's something like a special dividend of $8.25 for example, and strike of 600 would drop down to 591.75. Example of an odd adjustment like that here: seekingalpha.com/article/405191-apple-options-traders-beware-of-special-dividendsThank you very much for the link. This does eliminate a big part of the problem. But, what happens if your short call in a bull call spread gets assigned? This recently happened to me. You are now short common shares instead of calls. If you hold this position past the dividend date you will now owe the dividend on the short position. I believe my assignment occurred at the last possible moment leaving me no time to defend against it. Therefore, if the special dividend is large the short position may be very costly.
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Post by jeffi on Nov 27, 2012 20:34:48 GMT -8
Regarding assignment risk for a special dividend, there basically is none from what I understand, unlike for a regular dividend. Getting exercised would be a good thing if you have a spread. Example: Suppose you have a 500/525 call spread and AAPL is at 600, and your 525 is exercised before a special dividend of $10 for instance. So you get put shares at $525 and then you payout $10 because you haven't exercised your 500 calls yet, so you've basically sold shares for $515. After the dividend payout, the strikes are lowered by $10, and you are now long 490 calls instead of 500s. So you exercise those, and at that point, you've realized the full width of the spread of $25! ($515-$490). If it was a regular dividend of $10, you'd lose $10, but in the case of the special dividend, you don't lose the $10 because of the strike adjustment. Hope that makes sense. If your short calls are assigned, they're called away. Not "put", as that would occur with a put, not a call. Also, after the assignment you are now short common instead of calls which creates a margin issue. Otherwise, I hope your right, as I was burned on this during the last dividend. Also to note, many people do not have the cash to exercise their long calls.
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JDSoCal
Member
Aspiring oligarch
Posts: 4,182
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Post by JDSoCal on Nov 27, 2012 20:36:11 GMT -8
Stk Calls Puts 570 5,867 11,993 575 6,000 7,519 580 8,023 7,809 585 9,508 4,656
Range is 575-579.99, but as you can see, 580 is almost tied.
I assumed we were in (good) Sentiment Mode™ until today's action, so we'll see.
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Post by nkmho on Nov 27, 2012 20:36:33 GMT -8
Regarding assignment risk for a special dividend, there basically is none from what I understand, unlike for a regular dividend. Getting exercised would be a good thing if you have a spread. Example: Suppose you have a 500/525 call spread and AAPL is at 600, and your 525 is exercised before a special dividend of $10 for instance. So you get put shares at $525 and then you payout $10 because you haven't exercised your 500 calls yet, so you've basically sold shares for $515. After the dividend payout, the strikes are lowered by $10, and you are now long 490 calls instead of 500s. So you exercise those, and at that point, you've realized the full width of the spread of $25! ($515-$490). If it was a regular dividend of $10, you'd lose $10, but in the case of the special dividend, you don't lose the $10 because of the strike adjustment. Hope that makes sense. If your short calls are assigned, they're called away. Not "put", as that would occur with a put, not a call. Otherwise, I hope your right, as I was burned on this during the last dividend. Also to note, many people do not have the cash to exercise their long calls. Ah yes, that's what I meant, short shares, not put shares. I'll correct the post.
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Post by greedynoob on Nov 27, 2012 20:48:33 GMT -8
Regarding the potential risk to option holders in the event of a special dividend: As an FYI... I had bull call spreads on which the short call was assigned "called away" before the last dividend. This happened on both AAPL and MET spreads. It created a massive headache and a loss of profits (created a short common position with associated increases in margin and a dividend payout by me). I am trying to avoid further damage. I am not trying to scare people out of Apple. If I close my long calls I will use the proceeds to purchase common shares. I am very optimistic about Apple at these levels. Didn't MSFT issue a massive special dividend many years ago? Why isn't it possible for Apple to consider one? They have the largest cash balance in the history of the market. Isn't it prudent to consider the possibilities? Why would Mark B call this "BS"? I have been a very successful long term holder of Apple. I also have nearly doubled my capital, compounded for 5 consecutive years (over a 30x return). Jeffi Your post was somewhat shrill, panicky and exaggerated. 1) A special dividend, undeniably possible, thought not likely--just because 2% of the Russell 3000 have done it, doesn't mean Apple is suddenly likely to. But good grief, Apple floating a bond issue to support a dividend even larger than their cash will support--that's flat-out absurd. 2) If they do announce a special dividend, your short legs will not be assigned that same day. You'll have some time to prepare. 3) As others have pointed out, strike prices will be adjusted, so you won't get totally screwed on the long positions. So, my answer to your question, this does not seem to be even remotely justification for selling everything tomorrow. Now, maybe we're overbought, maybe technicals indicate we could be on the verge of a $15-$20 pullback. Maybe there's reasons to sell, but the remote chance of a special dividend is not one.
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Post by jeffi on Nov 27, 2012 21:12:20 GMT -8
Regarding the potential risk to option holders in the event of a special dividend: As an FYI... I had bull call spreads on which the short call was assigned "called away" before the last dividend. This happened on both AAPL and MET spreads. It created a massive headache and a loss of profits (created a short common position with associated increases in margin and a dividend payout by me). I am trying to avoid further damage. I am not trying to scare people out of Apple. If I close my long calls I will use the proceeds to purchase common shares. I am very optimistic about Apple at these levels. Didn't MSFT issue a massive special dividend many years ago? Why isn't it possible for Apple to consider one? They have the largest cash balance in the history of the market. Isn't it prudent to consider the possibilities? Why would Mark B call this "BS"? I have been a very successful long term holder of Apple. I also have nearly doubled my capital, compounded for 5 consecutive years (over a 30x return). Jeffi Your post was somewhat shrill, panicky and exaggerated. 1) A special dividend, undeniably possible, thought not likely--just because 2% of the Russell 3000 have done it, doesn't mean Apple is suddenly likely to. But good grief, Apple floating a bond issue to support a dividend even larger than their cash will support--that's flat-out absurd. 2) If they do announce a special dividend, your short legs will not be assigned that same day. You'll have some time to prepare. 3) As others have pointed out, strike prices will be adjusted, so you won't get totally screwed on the long positions. So, my answer to your question, this does not seem to be even remotely justification for selling everything tomorrow. Now, maybe we're overbought, maybe technicals indicate we could be on the verge of a $15-$20 pullback. Maybe there's reasons to sell, but the remote chance of a special dividend is not one. Not so fast... I was not panicking. I was concerned because it could have been a big issue and may still be in the event of an assignment. You state that a special dividend is not likely? Apple is literally the best positioned to issue such a dividend. $120 billion in cash with no debt! Why is it not likely? You should at least try to back up your assertion with a reason. You state that it's flat out absurd to float a bond issue to pay a dividend. You flat out don't know what you are talking about. Microsoft did one this year precisely for this reason. Companies with large cash holdings overseas do not want to incurr the tax to repatriate the money so they float bonds at what are currently incredibly low interest rates. Other large companies have done this. Flat out indeed. You are correct that one will likely have time to prepare. Since I was caught off guard during the last dividend payout when my short calls were assigned I was now on alert. Once burned, twice shy. The treatment is different for special dividends. I did not know this at the time I posted. I was asking for assitance as I didn't want to lose again and wanted to make sure others did not as well. You could lose the attitude...
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Post by greedynoob on Nov 27, 2012 21:15:07 GMT -8
Also, after the assignment you are now short common instead of calls which creates a margin issue. Otherwise, I hope your right, as I was burned on this during the last dividend. Also to note, many people do not have the cash to exercise their long calls. Right, but many brokers will juggle things around with your long calls vs the assignment so that you do not have to exercise your long calls, and you just come out with the net as cash. Generally, you have to call them promptly the morning after the assignment--very short window in which to act before you just wind up short the common, and it depends on your broker, but you do have the chance if you have a good broker. Also, re your comment about it happening at the last minute--exactly, the people doing this do not want to hold the shares, which is why you don't have to worry about it happening when the dividend is announced, it will happen at the last possible minute. And one last thing, any time your short leg is in the money, you *could* be assigned any day. Odds are fairly low, but it absolutely can happen.
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Post by greedynoob on Nov 27, 2012 21:19:14 GMT -8
You state that a special dividend is not likely? Apple is literally the best positioned to issue such a dividend. $120 billion in cash with no debt! Why is it not likely? You should at least try to back up your assertion with a reason. Could and would are two entirely different things. Apple has shown clearly that they prefer to hold on to most of their cash. You state that it's flat out absurd to float a bond issue to pay a dividend. You flat out don't know what you are talking about. Microsoft did one this year precisely for this reason. Companies with large cash holdings overseas do not want to incurr the tax to repatriate the money so they float bonds at what are currently incredibly low interest rates. Other large companies have done this. Flat out indeed. I guess I wasn't clear. It's not flat-absurd for a company that wants to give the cash to share holders. It's flat-out absurd to expect *Apple* to do that. Microsoft is not Apple. You are correct that one will likely have time to prepare. Since I was caught off guard during the last dividend payout when my short calls were assigned I was now on alert. Once burned, twice shy. The treatment is different for special dividends. I did not know this at the time I posted. I was asking for assitance as I didn't want to lose again and wanted to make sure others did not as well. You could lose the attitude... Well, if you don't want to know why people reacted negatively to your post, so be it.
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mark
fire starter
Posts: 1,552
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Post by mark on Nov 27, 2012 21:47:16 GMT -8
For all of our sakes, I hope this does not happen. I can promise you all, you will be sorry if this comes to pass. Yes you will get a dividend check, but the value subtracted from AAPL will be more than the dividend payout. Not to mention the price to cash value goes straight to shit. Man this has gotten me in an ill mood. I'm not so sure. First of all, if Apple declared a one-time dividend of $10 or $20, I don't think the stock would decline more than $10 or $20. In fact, I think it would briefly decline that much and then likely go up from there. Second of all, I would much prefer a $10.60 dividend now instead of the next 4 dividends in 2013. Though in reality I would prefer no dividend at all - IMO it sends a value-stock vibe rather than a growth-stock vibe to the world. And, sure enough, we trade in value territory nowadays. Third of all, even if Apple did give a $20 special dividend, it's price to cash would still be higher than any other company in the world! BTW, does anyone even track price to cash ratio and use it to compare companies with each other?
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Post by tuffett on Nov 27, 2012 22:29:47 GMT -8
My disgust comes from your urgent alert to sell everything tomorrow. If you had just put forth the points you stated it would not have rubbed me so bad, but your "fire in the theater" antics do not sit well. The BS is related to your urgency, not the fact of having to deal with any special dividend. For all of our sakes, I hope this does not happen. I can promise you all, you will be sorry if this comes to pass. Yes you will get a dividend check, but the value subtracted from AAPL will be more than the dividend payout. Not to mention the price to cash value goes straight to shit. Man this has gotten me in an ill mood. I think you're overreacting big time here. The question was rather innocent, and he asked for constructive feedback. He was not urging everybody to sell their shares. How do you know for a fact the stock would drop more than the dividend payout? You don't. If I were to guess I would say the stock recovers any loss rather quickly, since AAPL's cash is seemingly ignored anyway, in terms of how the stock is valued.
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Post by kloot on Nov 27, 2012 23:55:59 GMT -8
Kloot, Horace actually did a very extensive study on AAPL's price to cash. I will try to dig it up. yes, I know. but I also heard he later said it was somewhat "tongue in cheek." don't know if that's accurate, but it's believable. I think most would say aapl gets no credit in the market for its cash. I know Travis loves the cash multiple but I just don't see it. I would posit cash has grown at a similar rate as earnings and earnings have driven the stock higher. what if apple decides to use all of its cash to buy back shares? according to theory of cash multiple, stock would plummet but eps would rise significantly. IMO stock would rocket up.
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Post by bloodylongaapl on Nov 28, 2012 2:02:43 GMT -8
Agree Kloot, I read that too, it was very much anecdotal. Thinking about it logically, at BEST cash is a consequence of past performance, and in itself provides no guidance whatsoever about present and future health of a given company. How then can it be any sort of reliable or sustainable measure of value?
The reliable nature of the P/C ratio in the past few years simply points to the until-now reliable nature of Apple's growth and cash policies. It cannot in my mind be used as a prediction, it is purely backward-looking as a metric.
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Post by rickag on Nov 28, 2012 4:23:32 GMT -8
Just curious, this works well in $5 dividend increments, but what happens if the dividend isn't in a $5 increment? Round off to the nearest $5? Or am I over thinking this? If there's something like a special dividend of $8.25 for example, and strike of 600 would drop down to 591.75. Example of an odd adjustment like that here: seekingalpha.com/article/405191-apple-options-traders-beware-of-special-dividendsThank you for the reply. If Apple does this I hope it would be in $5 increments.
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Post by david on Nov 28, 2012 4:49:06 GMT -8
… at BEST cash is a consequence of past performance, and in itself provides no guidance whatsoever about present and future health of a given company. How then can it be any sort of reliable or sustainable measure of value? … Be that at as it may, there are a number of people who do follow P/C ratio for AAPL, which normally resides in the 4.0 to 5.0 range. Take out $10 per share of cash and you might well see a 40 to 50 dollar drop in share price. But wait, … naaah. Nobody ever said mr. market is rational or intelligent.
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