Wrote my first option yesterday. Got assigned on it 16 hours later.

[spindr0]

Since the dividend is a known event, why wouldn't the dividend also be reflected in the price of the put (in addition to whatever time premium is left in the put) for the same reason you state above?

I have seen many of my ITM short calls assigned early before ex-dividend. I have never seen a short-put assigned early before ex-dividend. I have read that it is mostly done for tax reasons, but don't recall the explanation.

Yes, pending dividends are reflected in the option premiums (puts increase and calls decrease).

OK, you have seen many of your ITM short calls assigned early before ex-dividend and you have never seen a short-put assigned early before ex-dividend. Therefore, your finite experience with these negates conversion, reversal and discount arbitrage?

Here's what I suggest. Provide an example of an ITM call that has time premium but where that time premium is less than a pending dividend and demonstrate that it is more profitable to exercise the call than to sell it. Provide the stock and strike price, premium and dividend.

ITM covered calls are exercised early because when there's a pending dividend, they often trade at a discount. If a call seller (STC) accepts less than parity, the buyer will immediately do a discount arbitrage, something the call seller could have done himself to avoid the haircut. This discount arb itself has nothing to do with the dividend.

Citing Alan Ellman of The Blue Collar Investor as a rebuttal isn't a winning argument. He has it wrong. He has carved out a nice niche in the covered call department but he falls short when it comes to a deep understanding of options.

 

[spindr0]

As for Puts being exercised, it's pretty clear why the OTM is never exercised.But why would you ever expect an ITM put to be exercised before the ex div date??

Depending on carry costs,and the value of the "short call",wouldn't it make more sense to always exercise a long ITM put immediately after the stock goes ex div??

There's an arb available if the time premium of an ITM put is less than the dividend. Here's a simple hypothetical example:

XYZ is $40
Sep $45 put is $5.30
ex div is tomorrow for 50 cts

Buy stock, buy put, exercise after ex-div, collect dividend on Pay Date

- $40.00 - $5.30 + $45.00 + $.50 = + 20 cents

It is a misconception that when dividends exceed the time premium of an ITM then it is profitable to early exercise the call. The short answer is that share price is reduced by the stock exchanges by the amount of the dividend so there is no profit there. If you exercise a call with time premium remaining, you throw away the time premium and the so called arb is done at a loss.

 

[taowave]

Appreciate it..I was referring to a poster who said he had never seen a put exercised pre ex div..

There's an arb available if the time premium of an ITM put is less than the dividend. Here's a simple hypothetical example:

XYZ is $40
Sep $45 put is $5.30
ex div is tomorrow for 50 cts

Buy stock, buy put, exercise after ex-div, collect dividend on Pay Date

- $40.00 - $5.30 + $45.00 + $.50 = + 20 cents

It is a misconception that when dividends exceed the time premium of an ITM then it is profitable to early exercise the call. The short answer is that share price is reduced by the stock exchanges by the amount of the dividend so there is no profit there. If you exercise a call with time premium remaining, you throw away the time premium and the so called arb is done at a loss.

 

[ET180]

There's an arb available if the time premium of an ITM put is less than the dividend.

That's true, but you'll never see that, at least not as a retail trader after you take commissions and short stock borrowing cost into consideration. That's a very easy trade to automate and my bet is that many firms have algorithms that look for those situations assuming that the profit potential is worth the effort.

Citing Alan Ellman of The Blue Collar Investor as a rebuttal isn't a winning argument. He has it wrong. He has carved out a nice niche in the covered call department but he falls short when it comes to a deep understanding of options.

Whatever. It happens. I have seen it happen many times. Many articles warn about early assignment of call options due to ex-dividend. I don't need to prove anything to you.

 

[ET180]

There's an arb available if the time premium of an ITM put is less than the dividend. Here's a simple hypothetical example:

XYZ is $40
Sep $45 put is $5.30
ex div is tomorrow for 50 cts

Buy stock, buy put, exercise after ex-div, collect dividend on Pay Date

- $40.00 - $5.30 + $45.00 + $.50 = + 20 cents

It is a misconception that when dividends exceed the time premium of an ITM then it is profitable to early exercise the call. The short answer is that share price is reduced by the stock exchanges by the amount of the dividend so there is no profit there. If you exercise a call with time premium remaining, you throw away the time premium and the so called arb is done at a loss.

You'll never see that situation. Not as a retail trader. I would think even the broker would simply perform the arbitrage and the order would never go to market.

 

[spindr0]

That's true, but you'll never see that, at least not as a retail trader after you take commissions and short stock borrowing cost into consideration. That's a very easy trade to automate and my bet is that many firms have algorithms that look for those situations assuming that the profit potential is worth the effort.

... I would think even the broker would simply perform the arbitrage and the order would never go to market.

The problem here is that you're throwing a lot of spaghetti against the wall, hoping something will stick, while avoiding the issue.

Take commissions into account? Many brokers have eliminated them.

Take short stock borrowing costs into account? This is an overnight dividend capture arb. Buy the stock tonight, exercise tomorrow, receive the dividend on Pay Date. For large caps, the borrow rate is 0.25% PER YEAR. One day at that rate? Stop wasting my time.

Whether you will see this as a retail trader has nothing to do with the early assignment. If the arb exists with the put, floor traders and market makers will snatch it up and your short position will be assigned.

And if the broker performs the arbitrage, what's the end result? You will be assigned early which is the end result of the arb I explained. Stop running in circles.

Let's cut to the chase. You started this all off by saying that if the time premium of a call is less than the dividend, it will be exercised. So where's your example of any real time quotes that demonstrates it? No more spaghetti, no references to what some else on the internet said, just some numbers?

 

[ET180]

The problem here is that you're throwing a lot of spaghetti against the wall, hoping something will stick, while avoiding the issue.

Take commissions into account? Many brokers have eliminated them.

Take short stock borrowing costs into account? This is an overnight dividend capture arb. Buy the stock tonight, exercise tomorrow, receive the dividend on Pay Date. For large caps, the borrow rate is 0.25% PER YEAR. One day at that rate? Stop wasting my time.

Whether you will see this as a retail trader has nothing to do with the early assignment. If the arb exists with the put, floor traders and market makers will snatch it up and your short position will be assigned.

And if the broker performs the arbitrage, what's the end result? You will be assigned early which is the end result of the arb I explained. Stop running in circles.

Let's cut to the chase. You started this all off by saying that if the time premium of a call is less than the dividend, it will be exercised. So where's your example of any real time quotes that demonstrates it? No more spaghetti, no references to what some else on the internet said, just some numbers?

That "example" that you posted was completely made up. You'll never see a $0.20 / sh overnight arbitrage opportunity as a retail trader so clearly you have never done this type of trade. What you consistently ignore is the fact that the put options will have the dividend priced in so no arbitrage opportunity exists in the first place...but as I pointed out, even if it did, you would never see it as a retail trader.

If the time premium is less than the dividend, it will likely get exercised. I know this because I have seen it happen many times. Here's another article that says what I stated earlier:

https://www.fidelity.com/learning-c...cts/options/dividends-options-assignment-risk

And here's a notification that I recently got from my broker, IB, regarding stocks trading ex-dividend:

"IBKR FYI: Dividend-Triggered Option Exercise Advisory
Your account(s) hold long and/or short call options whose underlying stock is scheduled to trade ex-dividend within the next two trading days..."

So before responding, ask yourself this:

1. Do you think Fidelity, IB, and other brokers who warn about ex-dividend early assignment risk are wrong? I have been getting these notifications for years on hundreds of stocks / ETFs. I usually get one or two a week as do their other customers. Do you think that IB is simply mistaken and there has never been early assignment risk for short calls? What's the likelihood that they have been mistaken for years and no one has pointed that out to them?
2. Why do they only warn about call options and not puts?

I already answered the second question for you. Good luck.

 

[Amun Ra]

UPDATE​

Just thought I would update. But as of today, Jan 31st, I have still not had the dividend money taken out of my account. Today was supposed to be the payable date, so I'm guessing that if they haven't taken it out yet, it's probably not going to happen.

So I guess it wasn't one of these big wall street algo's that exercised the option. It was probably one of you noobs.

 

[ironchef]

UPDATE​

Just thought I would update. But as of today, Jan 31st, I have still not had the dividend money taken out of my account. Today was supposed to be the payable date, so I'm guessing that if they haven't taken it out yet, it's probably not going to happen.

So I guess it wasn't one of these big wall street algo's that exercised the option. It was probably one of you noobs.

It ain't over till the fat lady sings. From one newbie to another.

 

[PoopyDeek]

Was trying a new strategy with writing options. I wrote just 1 SPY DEC20 319.50 call and someone assigned it to me when the price of SPY was 319.39 which seemed weird.

I read that assignments are rare and was not expecting my very first option to be exercised. Anyone have any insight into why someone would do this? SPY immediately went up in pre-market from the 319.39 price, but I was assigned at exactly 4:30am EST

lol Trumpers and trading vol are incompatible.