Monday, June 1st 2020
Implied Dividends: How We Calculate What The Options Market Expects For Future Dividends
Calculating what the options market implies for a dividend involves lining up the call and put weighted implied volatilities and getting the inputs for interest and dividends consistent.
Implied dividends are calculated by lining up the call and put weighted implied volatilities and getting the inputs for interest and dividends consistent. This process allows for a good look at what the options market expects for future dividends, which can provide insight into what firms may be cutting in the future.
With many firms cutting their dividends because of the financial pinch of the virus, implied dividends give a good picture of firms the options market believe might be the next to cut.
The report below is our annual implied dividend vs. actual projected dividend report. Firms like Winnebago, Wells Fargo and Disney appear to the options market as having their dividend implied in options prices at lower levels than projected from announced dividends.
We start with a dividend yield from the projected discrete dividends and risk free yield rate.
Next, we solve for the residual yield rate for each expiration that lines up the call and put implied volatilities (IV), weighted by delta and market width of each options pair.
We identify the number of dividends in each expiration and add the residual dividend.
We weight the residual dividend by time and come up with a weighted average of the estimated annual implied dividend from each expiration.
From this process we are able to discern, when the markets are tight enough, a good look at what the options market expects for future dividends. Comparing this implied dividend to the projected dividend provides color on what firms may be cutting in the future.
Implied dividends have foreshadowed cuts by DIS WYNN and other firms. Using options prices to implied dividends ORATS presents a possible suspension list of companies.
Kohl's dividend cut was precipitated by a falling implied dividend from options prices. Others like WYNN EXPE could follow.