1. You wouldn't be able to make profits from arbitrage opportunities... of course you could make a profitable trade, but this doesn't have anything to do with dividend.
2. It's all about put/call parity. Basically, an ITM call is exactly the same as the same strike OTM put + 100% stock.
Spot = 100; the 80-call with delta 70 = 80-put with d30 + 100 stocks. They have the exact same payoff and hence are the same. That's how MM's hedge etc.
So, looking at VOD 23 strike. 23-put = 0.19. If you wouldn't exercise the 23-call before dividend, the value would be 2.14 the day after.
Put/Call parity: ex-div spot 24.95, 23-put 0.19, 23-call = (24.95 - 23 + 0.19) = 2.14
Day before dividend this 23-call = (25.44 - 23 + 0) = 2.44 ..... (the 1 day 23 put = no value left)
So that's why you exercise, because if you don't you will lose 2.44-2.14 = 30 cents
Which is also the difference between de dividend and the value of 23-put. (0.49 - 0.19).
Basically, if you keep the call, you lose the dividend and gain the put value. If you exercise the call, you get the dividend through the new +stock position, but lose the put value.
So when the put value is the same as the dividend, you neither lose nor gain by exercising before dividend.
(ps. normally you should also account for interest, but that's very low now and I don't want to elaborate on it... you should get the picture by now)
3. Kinda the same. If you don't exercise the ITM call on expiration you lose the intrinsic value... Cost-wise you might not exercise when the call is only 1ct ITM....
The risk for being short the ATM call or put, when the stock closes exactly on your short strike, is that you don't know what position you have the next day. This is called 'pin-risk'.
2. It's all about put/call parity. Basically, an ITM call is exactly the same as the same strike OTM put + 100% stock.
Spot = 100; the 80-call with delta 70 = 80-put with d30 + 100 stocks. They have the exact same payoff and hence are the same. That's how MM's hedge etc.
So, looking at VOD 23 strike. 23-put = 0.19. If you wouldn't exercise the 23-call before dividend, the value would be 2.14 the day after.
Put/Call parity: ex-div spot 24.95, 23-put 0.19, 23-call = (24.95 - 23 + 0.19) = 2.14
Day before dividend this 23-call = (25.44 - 23 + 0) = 2.44 ..... (the 1 day 23 put = no value left)
So that's why you exercise, because if you don't you will lose 2.44-2.14 = 30 cents
Which is also the difference between de dividend and the value of 23-put. (0.49 - 0.19).
Basically, if you keep the call, you lose the dividend and gain the put value. If you exercise the call, you get the dividend through the new +stock position, but lose the put value.
So when the put value is the same as the dividend, you neither lose nor gain by exercising before dividend.
(ps. normally you should also account for interest, but that's very low now and I don't want to elaborate on it... you should get the picture by now)
3. Kinda the same. If you don't exercise the ITM call on expiration you lose the intrinsic value... Cost-wise you might not exercise when the call is only 1ct ITM....
The risk for being short the ATM call or put, when the stock closes exactly on your short strike, is that you don't know what position you have the next day. This is called 'pin-risk'.