Early exercise + dividend capture: Did I miss obvious $?

D

d0rian

I've typically only traded options on non-div underlyings, and I think I made a modest mistake so just trying to understand it in order to avoid in the future.
  • I was long 10 VET $46 Oct 21st Calls (canadian listing, not US)
  • At the beginning of last week, VET was trading ~$54, and was going ex-dividend on Thurs Oct 20th (div = $0.22, declared on 10/14)
  • The option contract was pretty thinly-traded: only bids were from MM who was offering a few cents below intrinsic, so essentially zero time premium left.
Seeing only below-intrinsic offers, I just held it til expiry, but of course the SP dropped by the $0.22 dividend amount when the market opened on Thurs Oct 20th. So essentially I exercised the $46 Call, but took delivery of shares that were worth $0.22 less than they would have been had I exercised on Oct 19th or earlier.

Questions:
1) Am I thinking about this correctly, and if so I screwed up here, right?
2) Is the above basically the textbook example of the circumstances that make exercising early a no-brainer? Are there ANY arguments for not exercising early in situations like this?
3) What did I cost myself exactly...just the $220 in dividends?
 
The key here in weather to exercise your calls is where the Oct 21 46 puts are trading. If you exercised your 46 calls, you are essentially selling the puts for the dividend of .22 (less the extra cost of carry of the stock vs the calls you had, which would be negligible in this case.)

The reason for this is long the Oct 21 46 put and long the stock is a risk equivalent position as being long the Oct 21 46 call. This is basically how you figure if you should exercise a call before a dividend.

I'm guessing that the put was worth nothing and if you intended to let your calls expire into stock the next day anyway, yes you lost the $220 in dividends.

Also just because you only see bids below parity, it doesn't mean you wont be able to sell the option at a higher price. You certainly could have offered it a penny or 2 over parity and see.
 
Thanks for the replies.

FSU said:
The reason for this is long the Oct 21 46 put and long the stock is a risk equivalent position as being long the Oct 21 46 call. .22 (less the extra cost of carry of the stock vs the calls you had, which would be negligible in this case.)This is basically how you figure if you should exercise a call before a dividend.
More...

Is there a specific formula associated with this notion? I'd been thinking that the relevant Q (assuming you did not have strongly-held beliefs about the movement of the underlying) would simply be whether the dividend you'd stand to capture by exercising early was MORE than the extrinsic value you could get by selling the long Call. So with my $46 Calls, I'd think the Q would be simply whether I could get more than $8.22, and if not to exercise them early to capture the $0.22 dividend. ...but as I wrote, the MM's offer was hovering around 5 cents below intrinsic (~$7.95). Yeah, maybe I coulda gotten a nibble a few cents above $8.00, but seems like I should have just exercised early.

Though now I'm wondering why in a dividend-capture scenario like this, the MM (or anyone frankly) isn't offering up to, say, $8.20, knowing that they stand to capture a $0.22 dividend. Or to put it another way, I thought the MM's offer was about only $0.05 below parity, but given the impending dividend, it was really more like $0.27 below parity, right?
 
d0rian said:
Thanks for the replies.



Is there a specific formula associated with this notion? I'd been thinking that the relevant Q (assuming you did not have strongly-held beliefs about the movement of the underlying) would simply be whether the dividend you'd stand to capture by exercising early was MORE than the extrinsic value you could get by selling the long Call. So with my $46 Calls, I'd think the Q would be simply whether I could get more than $8.22, and if not to exercise them early to capture the $0.22 dividend. ...but as I wrote, the MM's offer was hovering around 5 cents below intrinsic (~$7.95). Yeah, maybe I coulda gotten a nibble a few cents above $8.00, but seems like I should have just exercised early.

Though now I'm wondering why in a dividend-capture scenario like this, the MM (or anyone frankly) isn't offering up to, say, $8.20, knowing that they stand to capture a $0.22 dividend. Or to put it another way, I thought the MM's offer was about only $0.05 below parity, but given the impending dividend, it was really more like $0.27 below parity, right?
More...

You need to think where the PUT is trading vs the dividend. Remember you are synthetically long a call when you are long stock and long the put. So you will have an identical position (of being long your call) if you buy the put and exercise your call (you will now be long stock and long the put). If you buy the put for less then the dividend and any extra interest charges for carrying the long stock you come out ahead.

The market maker will not want to pay a premium over parity in your case generally (some people might if it fits their position.) When he buys your call, he will short the stock to hedge his position. He will then exercise the call, end up with no position and lock in how much he bought it under parity. If he doesn't exercise he will pay out a dividend on his short stock.
 
  • Like
Reactions: Sig
Finally someone how knows a thing or two about options @FSU!

Because of put/call parity... calls and puts with the same strike generally have the exact same greeks, which is hard to understand by most people....

A long call is the same as a long stock position covered with a long put. It has the same delta/vega/theta/gamma. And also the same premium above intrinsic value.

So say, with the stock at 54, the 46 put Oct21 value is 22 cts, the Call is worth 8.22.
8 intrinsic plus 22 cts premium.
Now, because this call could be exercised early when there's a dividend before expiry... that early exercise depends on what you would get (dividend) and what you give up (premium/put value).

So in this case, if the value of the dividend exceeds 22 cts you should exercise before the ex-dividend date, because you would get the dividend and you can buy the exact same position by buying the put in combination with the received stock.... If it's the same, it wouldn't matter... if dividend is below 22 cts you would keep the call/not expercise.
 
JackRab said:
Finally someone how knows a thing or two about options @FSU!

Because of put/call parity... calls and puts with the same strike generally have the exact same greeks, which is hard to understand by most people....

A long call is the same as a long stock position covered with a long put. It has the same delta/vega/theta/gamma. And also the same premium above intrinsic value.

So say, with the stock at 54, the 46 put Oct21 value is 22 cts, the Call is worth 8.22.
8 intrinsic plus 22 cts premium.
Now, because this call could be exercised early when there's a dividend before expiry... that early exercise depends on what you would get (dividend) and what you give up (premium/put value).

So in this case, if the value of the dividend exceeds 22 cts you should exercise before the ex-dividend date, because you would get the dividend and you can buy the exact same position by buying the put in combination with the received stock.... If it's the same, it wouldn't matter... if dividend is below 22 cts you would keep the call/not expercise.
More...

I wouldn't be that sure about the same delta and the same theta for a call and a put with the same strike
 
I expected if the dividend is greater than the put of the same strike, the call option would get exercised (and buy the put). But on more than several occasions when I was short the call option, I only got partial assignment, so rather than being flat I ended up having a covered call (plus dividend). This had happened when the strike was close to the money, although the dividend amount was clearly greater than the put premium. Even if I was sure that partial assignments would continue, I don't know how to take advantage of it.
 
Eliterondrouge said:
I wouldn't be that sure about the same delta and the same theta for a call and a put with the same strike
More...
I think he meant that that both "sides" had the same delta and theta. Long put, long stock has the same greeks as long same strike call. And long call and short stock has the same greeks as long the same strike put.
 
You must log in or register to reply here.
Back
Top