MON question - early assignment dividend question

TrustyJules

TrustyJules

As I am bullish on the take-over of MON by Bayer, earlier in the year I bought a synthetic stock. I have cashed in and moved things about a bit since that time but my current position is

Long C JAN18 115
Short P JAN18 120

Because the fastest gains were in the decaying price of the put side (I have sold 100, 110 puts before), I thought to add a twist to my strategy. The merger decision will not be ready before Q4 so end august I decided to sell some shorter options against the long position in the mean time

Short C OCT6 117

Now it has to be said that MON options have been getting increasingly erratic in their quotes as time went along. I got 2$ for the short above but right now this option is quoted at $0.70/5.20 - there was a transaction at $ 2.85

Now when I chose this particular option I did know that MON presents results pre-open on 4th October. I reckoned that its fat volatility premium was at least in part due to the expectation that some news would be forthcoming on the merger. I dont think that is the case because the current state of the procedures makes this very unlikely.

What I OVERLOOKED was that MON will go ex-dividend on 5th October - most likely ca. 0.50$. With the option ending the next day and no sensible quote in the system, I have the impression that I risk an early assignment in this case and should try and close out early. I have traded - as a private investor - for 25 years and had many many short option positions also over ex-dividend dates but never been assigned on anything. My concern here is the lack of a real market for the option - the buyer of the option in fact cannot sell it so exercise would seem to make some sense.

What's the view of the board - will the buyer exercise on 4th October before the close or keep the option open? Obviously if the stock tanks on earnings the question becomes moot but I think it will do nothing and continute to gradually appreciate towards Bayer's bid price of $128 by end of year.
 
You provided a lot of information not related to the question so I'm not sure if this answers your question. To determine if an ITM call is worth early exercise to capture a dividend, you have to look at the value of the put on that strike. If you exercise early, you have cost of carry, the loss of the put value but you get the dividend. If the put is worth more than $0.50, it would be silly to exercise the calls and you don't have to do any more math. If the put is much less than the dividend, you have to add in the cost of carrying stock.

Does that help?
 
Thank you for answering and sorry if the background information overwhelmed the setting out of the real problem. I understand your answer of course - this would be the normal course of action. However in this case despite the fact that the call 117 is only a little ITM there is no way to ascertain its price from the market. The bid/ask quote is $0.70/5.20 - at the bid exercise is obvious at the ask it's stupid. The most recent transaction is from Thursday where it sold for $2.85. The put's intrinsic value is just about that - add the dividend and it looks like it would make sense to exercise. Remember there is only a few days time value left - the option I sold expires 6th October. However the market is so irrational due to the pending public offer that it may well be that someone would buy at > $3.25. Who is to know?

The buyer is in the same quandary as me the seller. He may be cutting himself badly short by exercising or it may be really smart. Now I am pretty sure that the option wont be exercised before earnings as - even in the absence of a market - theory would presume there to be IV in the option price that makes it worth holding. Furthermore the ex-dividend date is conveniently the day after earnings and the day before expiry.
 
The October 6th calls/puts on the 117 line are very wide. Given that the Oct 20 118 puts are .30/.60, and the open interest on your calls is 35, and expiration is only a few days later, I expect there is a good chance you will get assigned. I would. This is just my opinion, that if I were long those calls, I would do it.

Good luck.
 
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It's a virtual certainty you will be assigned. Unless the deal busts by then.

Fwiw I'm bullish on the deal as well but given the controversy around it, we are one trump tweet or EU statement from a 10percent selloff

How have you traded options for 25 years (which predates multiple listings) and never had an ex-div early assignment issue?
 
Just as an aside, I am not American, I am Dutch private investor and started trading on the then very novel EOE options exchange in Amsterdam around 1986. I trade frequently but am by no means a daytrader. As regards never getting assigned - well I dunno - I read about people getting assigned all the time and it just never happened to me. I have had countless short positions and many held in some hairy moments but always I felt that I was on the safe side due to what Robert outlined above. Even with an hour before closing there is a time value left. Otherwise I guess I have been lucky.

What caught me out here is the dividend day (my mistake - I overlooked it) and the disappearance of liquidity in a manner that puzzles me. For once I have a feeling that exercise makes sense for the buyer so my plan is to close one hour or so after open 4th October.

As regards the deal - I cant judge the US regulatory side except by looking at the EU one. For sure this deal is being coordinated in the International Competition Network where the US and the EU cooperate to get decisions that are as synchronised as local rules and politics allow. From the EU side the deal entered a phase II but this is a good sign for several reasons. The main one is that if the EU wants to stop it they will at some point have to declare their position and this is legally tricky. For the merging parties this is an advantage and strengthens their position if there are sacrifices suggested (they cannot be demanded in Europe) which they are unwilling to make. Secondly the strategic interest of the merger covers geographical areas or markets where there is little overlap - therefore concessions are only required in non-strategic areas. This is doable but requires some time to do right also in the interest of other stakeholders, a phase II investigation allows for this. Unless there is a stop the clock moment - for which I see no grounds at the moment but it could occur if a divestment is complex - the EU will decide by 6th of January 2018.
 
That makes sense as European divs are paid once a year.

Re: Monsanto the liquidity is dry because of the merger. Not the div in this case.

I figure there will be some delays pushing this into q2 next year. This deal has been pitched as creating a monopoly on food even though that's actually not the case. Ultimately I think the deal will go through.
 
Liquidity in those options is probably low because it's a weekly...

99.5% chance you will be assigned... those 5th oct 117 puts are worth less than the dividend, which is why the holder should exercise.
 
Liquidity on all MON options went to hell since beginning of August - results are due today and I am closing out after 30mn. Will try to aim for intrinsic+dividend and see where we get to. As I got 2$ to start with its not a disaster for the moment anyhow.
 
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