Early assignment question

What if you do this lets say with GE. Sell a Deep in the money call for 1 year (2010 jan) to collect the 9% dividend.

As long as GE keeps the dividend for 2009 it should be decent right?

Use the premium you then collected and write some puts for spy?
 
Quote from noob_trad3r:

What if you do this lets say with GE. Sell a Deep in the money call for 1 year (2010 jan) to collect the 9% dividend.

As long as GE keeps the dividend for 2009 it should be decent right?

Use the premium you then collected and write some puts for spy?
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Selling a call does not let you 'collect the dividend.'

The calls are priced with the knowledge that the dividends are coming. It is not a surprise. The option's value (and price) do not decline every time there is a dividend.

THEY DECLINE ONLY WHEN THE CALL SHOULD HAVE BEEN EXERCISED FOR THE DIVIDEND, and not otherwise.

You are looking for something that is not there.

And don't forget, if you sell the calls naked, you have a large upside risk. If the write the calls when covered, you do collect the dividends, but don't forget that you also pay interest on the cash used to buy stock.


Also: Selling SPY puts is not going to give you a high correlation when selling GE calls.

Mark
http://blog.mdwoptions.com/options_for_rookies/
 
Quote from dagnyt:

Selling a call does not let you 'collect the dividend.'

The calls are priced with the knowledge that the dividends are coming. It is not a surprise. The option's value (and price) do not decline every time there is a dividend.

THEY DECLINE ONLY WHEN THE CALL SHOULD HAVE BEEN EXERCISED FOR THE DIVIDEND, and not otherwise.

You are looking for something that is not there.

And don't forget, if you sell the calls naked, you have a large upside risk. If the write the calls when covered, you do collect the dividends, but don't forget that you also pay interest on the cash used to buy stock.


Also: Selling SPY puts is not going to give you a high correlation when selling GE calls.

Mark
http://blog.mdwoptions.com/options_for_rookies/
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Oh I meant selling calls after buying GE stock to provide the cover (13.08)

now I have cash no margin etc.. since I do not trade using margin (too risky for my tastes)


I figured write the puts one month out or two on SPY since it is not too closely correlated but to collect some premiums again and own SPY if it drops then write calls on SPY if that happens.

I was thinking of writing SPY 65 puts for march with the premiums collected from the GE Deep in the money covered call jan 2010 call.
 
Mark, i find the example in your blog referred to above misleading. Perhaps you can clarify as i'm sure others are equally misled.

You state that upon assignment you by the short call back at zero (fair enough) which is $1500 less than its value yesterday (also fair enough). However I am sorry to say that your statement: "You have lost nothing." that begins the paragraph is just flat wrong if you consider only the short XYZ Nov 60 Call Leg of your hypothetical Spread (you don't say what the other leg of the Spread is). You are not going to collect anything like $1500 in premium because you did not sell the call "yesterday," you sold it back when the stock was trading much lower. You don't break anywhere near even on this trade. You lose $1500 minus the premium, and the premium collected is much less than $1500! Of course, if you want to gamble and remain short the stock after assignment, you could get lucky, but you could also lose even more if you remain short and the stock continues to rise past the $75 you had to pay to deliver it at $60.

Please correct me if i'm wrong about this, but i just don't see anyway that your statement :"You have lost nothing." is correct.
 
Quote from piezoe:

Mark, i find the example in your blog referred to above misleading. Perhaps you can clarify as i'm sure others are equally misled.

You state that upon assignment you by the short call back at zero (fair enough) which is $1500 less than its value yesterday (also fair enough).

My broker shows the transaction as buying the call at a price of zero. The trade date is 'yesterday' because you are notified the morning after the 'trade' occurs.

However I am sorry to say that your statement: "You have lost nothing." that begins the paragraph is just flat wrong if you consider only the short XYZ Nov 60 Call Leg of your hypothetical Spread (you don't say what the other leg of the Spread is).

I'm sorry to tell you that you are incorrect. Gains offset losses for a net loss of zero.

Other side of the spread? It's a covered call.

You are not going to collect anything like $1500 in premium because you did not sell the call "yesterday," you sold it back when the stock was trading much lower. You don't break anywhere near even on this trade. You lose $1500 minus the premium, and the premium collected is much less than $1500! Of course, if you want to gamble and remain short the stock after assignment, you could get lucky, but you could also lose even more if you remain short and the stock continues to rise past the $75 you had to pay to deliver it at $60.

Please correct me if i'm wrong about this, but i just don't see anyway that your statement :"You have lost nothing." is correct.

You wrote a covered call. You collected an option premium at the time you wrote the call. The assumption is that you collected time premium - i.e., premium above intrinsic value - or else it would have made no sense to sell the option.

You have been ASSIGNED an exercise notice. That means you collected the maximum possible profit for that trade.

It was a covered call, so you have <b>no remaining position</b>. You are not naked short the stock. And you knew that there was no naked stock position because you knew there as 'another side' to the spread.

You bought the option at ZERO.

You sold the stock at the STRIKE PRICE.

That stock sale is $1,500 below the current price. Even though I do not like to look at it this way: You gained $1,500 on the option (from yesterdays price of $15) but you lost $1,500 by selling stock at the strike, which is $15 less than yesterday's price.

Total gains (from yesterday's prices): ZERO. You have lost nothing.

Total profit on the trade: The time premium in the option AT THE TIME YOU SOLD IT.

Thanks for visiting the blog.
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Mark
 
Quote from matgallis:

You call will be assigned the day before it goes ex-dividend.

Dagnty is wrong about being assigned WITH this strategy.
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What are you taking about?

Not every stock pays a dividend.

Not every stock that pays a dividend has a dividend large enough to make exercising an ITM call option a good idea.

The question referred to what happens AFTER an option is exercised (not <i>when</i> the call may be exercised) and the investor is assigned an exercise notice.

Your comment is 100% unrelated to the discussion.

Mark
 
Quote from dagnyt:

What are you taking about?

Not every stock pays a dividend.

Not every stock that pays a dividend has a dividend large enough to make exercising an ITM call option a good idea.

The question referred to what happens AFTER an option is exercised (not <i>when</i> the call may be exercised) and the investor is assigned an exercise notice.

Your comment is 100% unrelated to the discussion.

Mark
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Lets revisit the topic.


"Let' say I am doing a dividend capture and using a short deep ITM call, two-to-three months out, to hedge my long stock for 61 days (to get the favorable tax treatment on the dividend.) What is the likelihood and reason why my deep ITM call would be assigned early. Could it be bought back in pre-market trading for some reason, perhaps by a market-maker, and leave me unhedged, and probably unprofitable on this trade? I use IB, btw, if that matters."


a) he IS talking about collecting the dividends, so your point about not all stocks paying dividends is worthless.

b) he IS talking about being short ITM call

c) he IS asking about being assigned

d) Intuition suggests the above 3 are his worries


What thread are you in?


The short answer is, you're likely to be assigned, and not collect the dividend. Double loss, double fail. Watch the open interest on your dividend paying stock of choice, for an entire month before the stock goes ex-dividend. Take note how there is zero-> few open contracts deep ITM. Once you open your position, the MM is basically loaning you the difference between the strike and the market price of the security. Why would they do this AND let you collect the dividends?

If you are able to sell the call for premium (over commissions) then it's a favorable trade for you regardless if you capture the dividend. BUT that requires timing, with addition to the risk of assignment, this opens you up to more risk of not securing a profitable position. I.e the position runs away from you.

FYI, ->

http://www.elitetrader.com/vb/showthread.php?s=&threadid=155179

Same strategy, implemented 4 different trades. 2/4 assigned the day before going ex-dividend. The other 2 are still approaching their ex-dividend dates.
 
Mark, I 'm not sure what you were trying to say in your example, i'll just give up as it seems you have assumed in one part of the example that your short call is covered (you would make a little money in that case assuming your long stock was bought below 60) and in another part of the example you discuss "buying back" the stock at $52 (you would make a little money in that case if your short call was sold naked and you didn't cover it right away after assignment but stayed short until the stock dropped to 52 and then covered.

I'm afraid that figuring out what it is you are trying to say is is beyond my intellectual powers. Your main point was, i think, that being assigned early is nothing to fear, and on that point we are in agreement.
 
Quote from Tums:

which has more intrinsic value? (ie. less of the other stuff)

deeper ITM or
OTM?
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OTM calls always have ZERO intrinsic value

ITM calls always have SOME intrinsic value.

The 'other stuff' is time value. It's not clear which has 'less.' OTM options are 100% time value and deep ITM options usually have little time value. But if the stock is very volatile, it may have more time value than a very far OTM option.

Mark
 
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