Stock collar to capture dividend trade?

Saltynuts said:
Questions -

Is my math wrong - he will make 22 cents min on the collar, no?

Why would he have to pay 40 cents to finance the transaction newwurldmn? If he has money in his acccount to finance it?

Why might he not get the divvy if he holds on and after ex-divvy date?

Thanks!
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If he has cash in his account he will either earn the sweep or he can buy an interest bearing instrument to earn libor. This is his opportunity cost.

American option means it might be (in this case more likely than not) for the long call holder to exercise.
 
newwurldmn said:
If he has cash in his account he will either earn the sweep or he can buy an interest bearing instrument to earn libor. This is his opportunity cost.

American option means it might be (in this case more likely than not) for the long call holder to exercise.
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Ah, opportunity cost, got it. Yes, it seems like you should compare the $$$ you make doing this to the $$$ you could make doing something of equalish risk.

Didn't know long call holders might get the divvies. Interesting. Thanks!
 
You're short the $90 call. Assignment occurs if MSFT > $90 at expiration. That means that the $90 put will be worthless. How will you close the put for a profit?

Let's look at an example just before ex-div with expiration imminent. Take a look at BBY. Ex-div is tomorrow for 45 cents. The $65, $66, $67 and $68 calls for 3/23 trade below parity. If any long call holder decides to take the haircut and STC, the MM will do a discount arbitrage (buy call, exercise and immediately sell the stock). Tonight, someone expecting that dividend tomorrow morning finds out that the stock is gone. Poof! 42 cents is gone and you netted 22 cents less 4 commissions.
 
Saltynuts,

It's a conversion not a collar.

Yes, he will make 22 cents on the it.

He doesn't pay to finance the transaction. He gives up the interest earned on the cash in order to take the position.

He's not likely to get the dividend if the call is ITM just before ex-div due to discount arbitrage (see my other reply)

And no, call holders do not get the dividend. Only shareholders do (call exercised).
 
spindr0 said:
You're short the $90 call. Assignment occurs if MSFT > $90 at expiration. That means that the $90 put will be worthless. How will you close the put for a profit?

Let's look at an example just before ex-div with expiration imminent. Take a look at BBY. Ex-div is tomorrow for 45 cents. The $65, $66, $67 and $68 calls for 3/23 trade below parity. If any long call holder decides to take the haircut and STC, the MM will do a discount arbitrage (buy call, exercise and immediately sell the stock). Tonight, someone expecting that dividend tomorrow morning finds out that the stock is gone. Poof! 42 cents is gone and you netted 22 cents less 4 commissions.
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Since the expiration date is after the ex dividend, I would get the dividend on May 16th as the expiration date is on the 18th. Plus I would get the .16 profit from the conversion trade. Correct?
 
I guess the main question is would the call be assigned just before the ex dividend date of May 16, when there is a premium of over 2 dollars on the covered call portion? How much of a premium on a covered call is needed for it not be called before the expiration date?
 
johnmarg1 said:
Since the expiration date is after the ex dividend, I would get the dividend on May 16th as the expiration date is on the 18th. Plus I would get the .16 profit from the conversion trade. Correct?
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If you are not assigned early then you get the dividend.
 
johnmarg1 said:
How much of a premium on a covered call is needed for it not be called before the expiration date?
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It's not the amount of premium remaining in a covered call. It's a question of whether the bid trades below parity, or not. Do you understand what I explained in the BBY example?
 
If all stays equal... that call is going to be exercised prior to the dividend... so no, you won't capture anything.

If the stock stays around this level, 93-ish.... just before the dividend, the May 90 put will be trading around 10 cents... which would be the extrinsic premium in the 90 call after the dividend. This means, that if the call is not exercised.. the holder would lose 42 cents and gain 10 cents (value of put premium)... so it's a loss making decision when it's not exercised prior to the dividend... and therefore, the chance of it being exercised is near 100% (ceteris paribus.)
 
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