Options Action

Are oil dividends in danger? The options market doesn't think so

Options Action: Oil company dividend
Options Action: Oil company dividend

Many investors are speculating that Big Oil dividends could be in danger given how low the price of crude has dropped this year, but in an appearance on CNBC's "Squawk Box," Chevron CEO Michael Wirth defended his company's ability to keep its dividend intact.

"We continue to have a very strong balance sheet so our dividend is secure," Wirth said Wednesday. "We've stress-tested the future scenarios at prices lower than what we've seen today and still have plenty of capacity to pay the dividends."

Despite ongoing speculation, Wirth isn't alone in his sentiment. The options market also doesn't foresee a material cut to the stock's dividend anytime soon.

"We can compare the price of a synthetic equity position, using options, to the actual equity. I was looking at the January 2022 options, and you can back out — using interest rates and the current price of the stock — essentially how much [of a cut] the options market is implying in terms of dividends," Michael Khouw, chief investment officer at Optimize Advisors, said Wednesday on CNBC's Fast Money."

Since options don't receive dividend payouts, the dividend for the underlying equity at a given expiration can be calculated based on how future contract premiums for an option are priced.

Essentially, if these synthetic positions are discounted compared with an actual equity position, the market is signaling some degree of likelihood that the dividend could be reduced between now and a given expiration. 

"Right now, [Chevron] is paying about $1.29 per quarter, there are five quarters that you would be receiving dividends between now and January 2022 expiration, and the cumulative dividends are probably about a dollar shy of what you would otherwise be getting.

"But is a discount like that material enough to think that the dividend is going to be cut or seriously reduced? I don't think it really is."

Chevron was 1% higher in Thursday's session.