Why would someone buy deep in the money call on dividend stock?

D

dublidu

I just did a buy and write and I'm wondering why someone would take up the other side of this trade. I've rounded the numbers for simplicity:
Stock is $15, $3 call option with 400 days left is $12, so no premium. Stock pays high dividend, ex-dividend date in 2 weeks. Why would someone buy this call? Why not just buy the stock directly? Sure there's no premium, but it's not like they're getting any leverage or protection either. Obviously this is very thinly traded but I still don't get it.

I hope I don't get called before ex-dividend date and waste my brokerage fee, because that's the only risk I'm taking on my side of the trade.
 
Quote from dublidu:

I just did a buy and write and I'm wondering why someone would take up the other side of this trade. I've rounded the numbers for simplicity:
Stock is $15, $3 call option with 400 days left is $12, so no premium. Stock pays high dividend, ex-dividend date in 2 weeks. Why would someone buy this call? Why not just buy the stock directly? Sure there's no premium, but it's not like they're getting any leverage or protection either. Obviously this is very thinly traded but I still don't get it.

I hope I don't get called before ex-dividend date and waste my brokerage fee, because that's the only risk I'm taking on my side of the trade.
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Instead of rounding the numbers, tell us what stock and option you traded and the price and we will tell you the edge you gave up.
 
It was NLY, it was $16.32, I sold the $3 call option for $12.30, so $0.02 discount. I suppose a high frequency trader could have profited from the difference but there is just no volume here for them to make real money on that kind of difference. There is a $0.60 dividend due in 2 weeks. Anyone holding for longer than a second should have bought the stock directly instead of the call.
 
Quote from dublidu:

It was NLY, it was $16.32, I sold the $3 call option for $12.30, so $0.02 discount. I suppose a high frequency trader could have profited from the difference but there is just no volume here for them to make real money on that kind of difference. There is a $0.60 dividend due in 2 weeks. Anyone holding for longer than a second should have bought the stock directly instead of the call.
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I am assuming you did the Jan 13th 2013 3 call. You should be assigned on the short call before the dividend. If so you will lose .02 plus commissions (vs buying the stock at $16.32).

This trade was most likely done automatically by a market maker. While you saw a last of 16.32, he might of filled the trade against a slightly better stock price (assuming you didn't do the trade as a spread) Any discount to the stock price is profit for the MM.

I actually like this trade. There is an open interest of 174 in these options. If any are held by the public there is a small chance you may not be assigned. You will make .60 for each contract that you are not assigned on, so if you skate on even one, you will make money on the trade.

Good luck.
 
Quote from dublidu:

It was NLY, it was $16.32, I sold the $3 call option for $12.30, so $0.02 discount. I suppose a high frequency trader could have profited from the difference but there is just no volume here for them to make real money on that kind of difference. There is a $0.60 dividend due in 2 weeks. Anyone holding for longer than a second should have bought the stock directly instead of the call.
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Hey,

Just want to point out that $3 + 12.30 = $15.30. I will take that trade all day long.

Thanks

5yr
 
Quote from 5yrtrader:

Hey,

Just want to point out that $3 + 12.30 = $15.30. I will take that trade all day long.

Thanks

5yr
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LOL Yes of course you are right, I am assuming he sold the call for .02 under so 13.30 vs 16.32, or 12.30 vs 15.32. Assuming he had typo.
 
Quote from dublidu:

It was NLY, it was $16.32, I sold the $3 call option for $12.30, so $0.02 discount. I suppose a high frequency trader could have profited from the difference but there is just no volume here for them to make real money on that kind of difference. There is a $0.60 dividend due in 2 weeks. Anyone holding for longer than a second should have bought the stock directly instead of the call.
More...
1) Typo? Did you mean $13.30 ?

2) While less likely, apart from MM possibilities, the buyer of your call could have been closing an open position.
 
Some people will buy deep ITM calls because the delta is near 1. So one could get nearly a 1 to 1 move without having to dish out the full price of the stock.
 
The lack of response from the OP leads me to believe that he did, in fact, sell it for 12.30 and answered his own question.

LOL

5yr
 
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