Early Exercise of Call Option to Capture Dividend

[KAWill70]

Wikipedia has some interesting information on this subject.

http://en.wikipedia.org/wiki/Exercise_(options)

In particular, note the paragraph under "Early Exercise Strategy".

"A common strategy among professional option traders is to sell large quantities of in-the-money calls just prior to an ex-dividend date. Quite often, non-professional option traders may not understand the benefit of exercising a call option early, and therefore may unintentionally forego the value of the dividend. The professional trader may only be 'assigned' on a portion of the calls, and therefore profits by receiving a dividend on the stock used to hedge the calls that are not exercised."

 

[weewilly]

the days of "forgeting to exercise" are long over. if the calls are itm by 0.01 or more, they will be exercised/assigned.

 

[donnap]

Quote from weewilly:

A known dividend will already be priced into the options, so the price of a call won't drop by the amount of the dividend on the ex-date -- it will already be discounted.

Incorrect. The whole point of this thread is that the div. is not adequately priced into the ITM call.

Your statement is correct regarding puts and those calls with TV.

 

[donnap]

Quote from weewilly:

the days of "forgeting to exercise" are long over. if the calls are itm by 0.01 or more, they will be exercised/assigned.

No. Ex-div. is the event, not expiry. The calls must be exercised by the holder.

 

[Jerkstore]

Quote from weewilly:

the days of "forgeting to exercise" are long over. if the calls are itm by 0.01 or more, they will be exercised/assigned.

Not true at all. This strategy is not only alive and well, but the exchanges encourage this strategy by eliminating costs for "dividend" strategies. It's an easy way for an exchange to pad its volume stats.

Susquehanna is the master at this type of tiny-fraction-of-a-penny arb trading, and they will do it for SIZE.

 

[Jerkstore]

Quote from weewilly:

when your short calls trade at or below parity, assume exercise is imminent. that's it.

Wow, you are getting tore apart by the forum, and frankly you deserve it. Don't mislead the beginners by pretending you are knowledgeable.

To eyeball a potential exercise, compare the dividend to the price that the OTM option pair (the put) is trading. If the dividend is greater than the price of the put AND the costs associated with the exercise, then the call should be exercised.

 

[weewilly]

ha, i must be ready for the home. i was thinking expiration not ex-dividend. anyone see my teeth?

 

[jmichaelp]

A few years ago, for about one year, I was able to successfully trade deep ITM covered calls for the dividend. However, options started being exercised after regular trading hours so my stock was traded away the night prior to being eligible for the dividend.

This, like most strategies, worked great while it worked but conditions change & you have to be flexible to what works at the time to make money.

 

[tomk96]

Quote from jmichaelp:

A few years ago, for about one year, I was able to successfully trade deep ITM covered calls for the dividend. However, options started being exercised after regular trading hours so my stock was traded away the night prior to being eligible for the dividend.

This, like most strategies, worked great while it worked but conditions change & you have to be flexible to what works at the time to make money.

you were selling ITM calls? and hedging?

 

[BLUEDAY000]

Quote from jmichaelp:

A few years ago, for about one year, I was able to successfully trade deep ITM covered calls for the dividend. However, options started being exercised after regular trading hours so my stock was traded away the night prior to being eligible for the dividend.

This, like most strategies, worked great while it worked but conditions change & you have to be flexible to what works at the time to make money.

Wow ......

One record : 8 years / 5 posts

Almost 1 post every 2 years

What the next ?? 2013 ??

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jmichaelp


Registered: Aug 2003
Posts: 5