February Deltas and Exes

The date for options expiry this month is February 17.  While I was traveling last week, I talked myself into expecting a fairly complex trading week ahead for the Rescue My IRA portfolio since I had a few positions going ex-dividend this month, including a couple before Friday’s expirations.  While preparing this monthly assignment forecast post, I’ve found the situation not quite as complex as I thought, but I will make a note of the dividend situations in addition to the typical discussion of Deltas.

 

As I mentioned last month, in the book Options for Volatile Markets (linked over there to the right), Lehman and McMillan define delta as “the amount an option is expected to move for a one dollar move in the stock.”  Thus, as the value of delta approaches 1.00 – meaning a one dollar move in the stock will produce an equal move in the option price – you have a pretty good idea that your in-the-money option is going to be exercised.

 

Stocks going ex-dividend play into the probabilities for early assignment also.  You can imagine someone holding an option on a stock that is near-the-money or in-the-money taking a look at a scheduled dividend payout and doing some analysis to determine whether he or she is interested in collecting that dividend.  This becomes a straightforward calculation:  does the amount of the dividend exceed the remaining time value of the option?  In my portfolio, this month there is one definite early call waiting on my MSFT position, which goes ex-dividend on Tuesday, and I expect the stock to be called away Monday. 

Here is a table of the positions with a February option:

Estimated February 2012 Assignment Calculations

Recall that my goal in the Rescue My IRA account is to earn 1 percent per month, based on the December 31, 2011 value of the account.  That’s about $1,300 per month.  The results in the table – both the nominal results and the probability adjusted ones (here I have simply multiplied the option Delta value by the calculated stock gain) – show that I will meet my goals this month, before counting dividends and option premiums. 

Five of the positions are likely to be assigned based on their Deltas of 80%+:  DRI, GE, HAS, HRS, and MSFT. 

Two of the positions, IP and TGT, have already passed their ex-dividend date as of Fridays closing.  This is reflected in their Deltas of 50% - that will be corrected after trading in the options begins again Monday, and should be significantly higher than 50% given current prices. They are trading pretty close to the strike price, so if we have a good week it's likely they will be called away as well.

   

As before, it looks like I will have a substantial cash position to work with during the week after expiration.  I’ve been working on a new screen and have some candidate positions already identified.  But given progress here, it may be time to subscribe to a service that can do this for me…