No.
It only makes sense to create a box if bid offer is probhitive in closing the actual position.
In 2007 it made sense to trade boxes of you funded better than libor. But only a handful of firms could do that.
How to decide on the proper strike and expiry month while opening a long box spread
- Thread starter Victor123
- Start date
No.
It only makes sense to create a box if bid offer is probhitive in closing the actual position.
In 2007 it made sense to trade boxes of you funded better than libor. But only a handful of firms could do that.
So this discrepancy in the box price is solely an artifact of the instrument going ex-dividend immediately after?
Since most instruments drop by the dividend price immediately after going ex-div, why would it be beneficial to exercise a call and collect the dividend? It seems pointless.
Since most instruments drop by the dividend price immediately after going ex-div, why would it be beneficial to exercise a call and collect the dividend? It seems pointless.
If you didn't there would be arbitrage.
If I knew you won't exercise the call, I will sell you the call (at intrinsic value) and hedge at 100 delta. On ex-div date, the stock will receive the dividend and drop in price accordingly (no gain or loss). But the call will settle to the ex-div stock price (a gain to me and a loss to you).
Okay - I get that. Is there a strategy in that approach? I suppose you'll be hit with too many commissions for it to pay, but (theoretically), since the premium is about .5 over the 10 box, if STOCK expires a dividend value below the lower strike, then the calls would expire worthless - no reason to exercise, right?
If it moved well above the upper strike, then the box holder can exercise his long calls before ex-div and be at 0 position on the underlying without losing much time value. If STOCK doesn't move, then close the position before ex-div.
If it moves down in the meantime, the time-value of the dividend should drop - it should roughly match the delta of the option, I would think.
On a stock with high dividends, lots of volatility, and tight option spreads - could this work?
ofAlso, shouldn't the puts reflect the dividend? An ITM put will pick up the div price drop after ex-div, so it should have the mirror dynamic of the call, no?
Thanks for your comments - much appreciated.
,most market participants won't allow themselves to be arbed. So it's hard to trade it unless you can get favorable pricing and free commissions.
A put is different than a call. It's preferable to exercise after an ex date because the put will be worth more after the stock price falls.
A put is different than a call. It's preferable to exercise after an ex date because the put will be worth more after the stock price falls.