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.
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Early assignment question
- Thread starter nravo
- Start date
Quote from nravo:
Specifically, what would be the reason for buying a Deep ITM in the pre-market; he would be paying time value, not getting a dividend, what's the logic?
the key isn't in your logic.
the key is... IF there is money left on the table.
ie. what is there after deducting all the transaction cost?
Quote from Tums:
which has more intrinsic value? (ie. less of the other stuff)
deeper ITM or
OTM?
Let me rephrase: Why would someone, even a MM, buy a ITM call in the pre-market -- something that will when the market opens go ex-dividend and, theoretically, be worth less, along with the stock?
Quote from nravo:
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.
You are not getting correct replies.
1) The call could be assigned early - the day before the stock goes ex-dividend if either of these apply (there are other possibilities also, but let's keep this simple):
a) The dividend is greater than the cost to carry the stock through expiration. If that occurs, the call owner <i>may</i>exercise.
b) The call has a 100 delta and zero time premium.
2) No options trade in the pre-market, so forget that idea.
3) If someone does exercise the option - no assignment notices are handed out until AFTER the market closes for the day. Thus, you never have to worry about an assignment during the trading day.
4) If anyone did exercise the call option, you would NOT be unhedged. The exercise would take your stock, converting your buy-write into NO position.
5) The broker is irrelevant.
6) Yes, you can do that combo easily with IB. That means it's easy to enter the combo order - getting a fill will depend on the price you need.
Do not fear being assigned.http://blog.mdwoptions.com/options_...-assigned-an-exercise-notice-no-big-deal.html
Mark
The Rookies Guide to Options
Quote from nravo:
Let me rephrase: Why would someone, even a MM, buy a ITM call in the pre-market -- something that will when the market opens go ex-dividend and, theoretically, be worth less, along with the stock?
a) It does not trade in the pre-market. But let's assume it did.
b) The MM would buy the call in the pre-market at the DISCOUNTED price, not yesterday's price. That means the option price would be based on the ex-dividend stock price.
Mark