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The Anatomy of a Wynn Windfall

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Today's Wynn dividend is in a bit of a wheelhouse: big enough to cause some real repercussions on the options board, but not big enough to adjust strikes.

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So what happens to the options when a stock declares a special dividend?

It all depends on the size.

I bring this up because Wynn Resorts (WYNN) announced a $6 cash dividend (take that, Barron's!).

If a dividend meets a certain threshold, generally more than 5%, then an adjustment is made. Generally, option strikes are reduced after the stock goes ex-dividend, by the amount of the dividend. Sometimes though they change the existing options to include the dividend when you exercise, and then add a class of "new" options that do not include the dividend.

In either event, there's no real gain or loss to existing options positions (independent of what the stock might have done).

Today's WYNN dividend is in a bit of a wheelhouse: big enough to cause some real repercussions on the options board, but not big enough to adjust strikes. I can't find the exact date of the dividend, but I can tell from the screen it is before December expiration. So here's what happens.

The relationship between puts and calls on a given strike is fixed by the cost of money. In other words, let's say the strike is near the money (so as there is negligible early exercise risk in the puts). The Call Price - the put price + The Strike Price = the forward price of the stock. The forward price of the stock is equal to the current price plus the cost of carry of the stock. And the cost of carry is the interest between now and expiration minus the dividends between now and expiration.

Got all that? You won't be tested, it's just the concept we're after.

Anyway, throw a $6 dividend in out of the blue, and relationship between calls and puts on a given near money strike can move as much as that $6 in a blink. If you had a position that contained long stock, net long puts and net short calls, you got an absolute windfall.

I'll use the Dec 130 line as an example. Let's say you owned 100 shares, were short 1 Dec 130 call and were long 1 Dec 130 put. It's a locked position that had no delta, no gamma, no vega, no anything (why you had that on to begin with is another question, but it's just an example). With the stock up 9ish, the calls are up $1.50ish, and the puts are down $1.50ish, a $6 windfall win on a basically non-existent position in... WYNN.
postion in WYNN
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