Question about exercised sold call option before ex-dividend date

[Derrenoption]

Hello,

I wonder about something about Dividend Capture when one would combine an example like below:

Dividend: 3%

- Buying 100 stock of IBM á 100 dollars per share
- Sell an ITM call option at strike 97 for 3 dollars premium.

Let us for the sake of the example that theoretically the price in IBM will drop 3% to 97 dollar ON the open of the Ex-Dividend date. So we will loose 3% on the stock and make a profit on the call option.

My question is now here which I have not understand exactly. I have red that it is a big chance that the call option I sold will be exercised BEFORE the ex-dividend date in the above scenario. I wonder if this is true. If that is true, I wonder the below:

1. How often in the above scenario out of 100 times should/could this happen, if someone has a real experience of this?
2. At what stock price is it much bigger chance that the option is exercised?
3. If the call option gets excersised, will my 100 shares of stock be actually physically sold so I am not long the stock in the broker account which means that I will not get the dividend on the ex-dividend date?

 

[FSU]

First, a lot has been written about this if you do a search, but in summary,

You have not provided enough information to have any idea if your short calls will be exercised.

The easiest way to know if a long option will/should be exercised before a dividend is where the corresponding put is trading. If it is trading for less than the dividend you should generally exercise your long call. (You must also take into account the interest cost of carry of the stock).

So if you are long an IBM 97 call and the dividend is 1.40, and the same month and strike put is trading .80, then you will most likely be assigned. This is because the long call holder could exercise his call, and buy the put. He would then be long stock and long puts, get the dividend, have the same synthetic position (again there would be some interest charges.)

In your scenario, if you are assigned on your short calls, your stock would be taken and you would not get the dividend.

 

[Buy1Sell2]

Hello,

I wonder about something about Dividend Capture when one would combine an example like below:

Dividend: 3%

- Buying 100 stock of IBM á 100 dollars per share
- Sell an ITM call option at strike 97 for 3 dollars premium.

Let us for the sake of the example that theoretically the price in IBM will drop 3% to 97 dollar ON the open of the Ex-Dividend date. So we will loose 3% on the stock and make a profit on the call option.

My question is now here which I have not understand exactly. I have red that it is a big chance that the call option I sold will be exercised BEFORE the ex-dividend date in the above scenario. I wonder if this is true. If that is true, I wonder the below:

1. How often in the above scenario out of 100 times should/could this happen, if someone has a real experience of this?
2. At what stock price is it much bigger chance that the option is exercised?
3. Ifhe call option gets excersised, will my 100 shares of stock be actually physically sold so I am not long the stock in the broker account which means that I will not get the dividend on the ex-dividend date?

Non issue

 

[Pekelo]

Since so far you got bullshit answers, let me try...

Well, expert advice:

https://sixfigureinvesting.com/2010...covered-calls—too-hot-too-cold-or-just-right/

"If you sell deep in the money (ITM) options you may feel you’ve found the golden goose. The calls provide a great hedge, virtually eliminating risk from your position. Unfortunately, your calls will almost certainly be assigned the evening before the ex-dividend day. The owners of the calls are not about to let you get away with collecting dividends with such low risk, so they exercise the option you sold them. They call away your stock and they collect the dividend. Your position is closed out—no dividend for you. The only profit you might have is from any premium present when you created the position (if your net investment was less than the strike price). "

3. If the call option gets excersised, will my 100 shares of stock be actually physically sold so I am not long the stock in the broker account which means that I will not get the dividend on the ex-dividend date?

Yes.

The rule of thumb is that if the ITM calls have less time value than the dividend, they more likely to get exercised. So you either have to use a farer expiry date, or go up and OTM...

 

[Derrenoption]

The rule of thumb is that if the ITM calls have less time value than the dividend, they more likely to get exercised. So you either have to use a farer expiry date, or go up and OTM...

Thanks, I try to understand the: " if the ITM calls have less time value than the dividend"

If the stockprice is at 100 and say we sell the 100 strike for 1 dollar and the dividend is 3%.
Does this mean that the timevalue(1 dollar) is Less than 3%(3 dollar) and we are likely to be assigned?

If that is true, I wonder, if we assume that we dont get assigned on that position and the stock drops 3% we loose 3 dollar on the stock but we only gain maximum 1 dollar on the option premium which totals a 2 dollar loss, is that a true scenario?

 

[FSU]

Since so far you got bullshit answers, let me try..

Interesting that you would call my answer bullshit. I gave the correct and easiest answer of when to exercise a call. It is all dependent on the price of the put of the same strike as the call and the amount of the dividend.

 

[Pekelo]

Interesting that you would call my answer bullshit.

My apologies, your answer was indeed correct. I only read the first part of it...

 

[Pekelo]

1.If the stockprice is at 100 and say we sell the 100 strike for 1 dollar and the dividend is 3%.
Does this mean that the timevalue(1 dollar) is Less than 3%(3 dollar) and we are likely to be assigned?

2.If that is true, I wonder, if we assume that we dont get assigned on that position and the stock drops 3% we loose 3 dollar on the stock but we only gain maximum 1 dollar on the option premium which totals a 2 dollar loss, is that a true scenario?

1. Yes. Specially because the calls are ITM, so I would say you are 100% likely to be assigned before dividend day.

2. In that case yes. But it isn't a very likely scenario, although the point still stands: Sometimes it is just not worthy to try to get the dividend.

There is a valid strategy when you know that you would be assigned, but you still go for it, because of the quick premium gain. In the above scenario, since you know you will be assigned right away, you collect a cool 1% for a day's work. (assuming you sold the calls just before dividend day? It is just hard to find stocks where you can play this strategy, but this is a good one day set up. You can even just buy the stock and sell the calls 30 minutes before the close, the day before dividend day....

 

[ironchef]

I agree with Pekelo. However, it only happens with American type options which can be called anytime. European type cannot be called until expiration.

It happened to me on a few occasions with CSCO and MSFT options.

 

[Derrenoption]

There is a valid strategy when you know that you would be assigned, but you still go for it, because of the quick premium gain. In the above scenario, since you know you will be assigned right away, you collect a cool 1% for a day's work. (assuming you sold the calls just before dividend day? It is just hard to find stocks where you can play this strategy, but this is a good one day set up. You can even just buy the stock and sell the calls 30 minutes before the close, the day before dividend day....

I have red almost every link about this on google so I now try to sort out the details I am not 100% sure of.
I wonder something here.

As the scenario you mention:
If we sell the call for 1 dollar premium 30 minutes before the close and the ex-dividens is tomorrow and DTE of the options is for example 10 days which means that timevalue is left. Now if we get assigned 5 minutes before the close which means that we only had the option for 25 minutes. Does this mean that we keep the Entire premium which is 1 dollar? If that is true I wonder what the rules for this is and why it is so?

European type cannot be called until expiration.

I have thought about the european options as well as something very interesting as we don't get the risk of being assigned.
What I now wonder, isn't this so much better to then go for dividends for european stocks instead of american as we "know" that we actually have a hedge on the ex-dividend date?