Pubs special dividend question

[oscar23]

Following Cazenove saying that MAB could come to a deal regarding their property I thought I might load up on calls, but now it seems (having actually looked into it!) that this might not be the best strategy because if they issue a special dividend of 30/40% then the calls will be adjusted down... Am I getting this wrong? Surely such an announcement should benefit someone with a long Call position?
I asked this in the "Derivatives" section but there was an awkward silence
Any help much appreciated,
Osc.

 

[grantx]

Oscar,

At a guess, and focusing purely on intrinsic value, the calls will adjust to reflect the value of the underlying at a corresponding yield. For example, the current yield on a 100p stock is 5% or 0.05p, and a special div of 0.20p is announced. The value of the shares should increase to a point where, once again, the yield is 5%. Following payment of the special div they will revert back to the original price with the same yield and original premium.

I would suspect the calls have increased in value on the back of an increase in implied volatility because the mm’s will be cashing-in on possible higher demand. But if the underlying is known to go ex-special div by a certain date (and drops accordingly) will they jack the call iv’s and let sellers rake in the premium or will they jack the put iv’s to dissuade potential buyers?

Grant.

 

[oscar23]

Thanks for the reply Grant, interesting reading. MAB fairly collapsed today (down 3.5%) so I'll probably go long the stock instead of calls tomorrow and see how things go from there.
I'm amazed at how poor the liquidity is in the options, compared to even the most wacky US stuff there's very little going on with these MABs!

 

[Profitaker]

Oscar / Grant

Another reply in the derivatives section.