Confused about dividend risk

Discussion in 'Options' started by liamgekaf, Apr 15, 2020.

  1. liamgekaf

    liamgekaf

    https://i.imgur.com/mR21eLV.jpg
    I started to read options as a strategic investment to add to my current knowledge and I was confused by the example provided. Tastytrade says that exercising a call is worth it if the extrinsic value is less than the dividend, but this book says that is not always the case. If the example provided in the book is accurate than why would anyone exercise to capture the dividend?
     
  2. Robert Morse

    Robert Morse Sponsor

    https://www.elitetrader.com/et/threads/spy-dividend-plays.336022/#post-4928857
    "The general answer is that if the value of the put on the same strike as your ITM call exceeds the values of the dividend including the cost of carrying, you are at risk of an early assignment." So if I had that call, and the math works, and I have the money for margin, I'd rather have the stock and long put and get the dividend, then hold the long call.
     
    liamgekaf likes this.
  3. liamgekaf

    liamgekaf

    Thank you for your response, if I understand correctly the equation is if the Put Price > (Transaction Costs + Dividend) then it is profitable to exercise. I also asked someone else the same question and they responded differently. He said that it is profitable to exercise when the extrinsic value of the put, and of the call and any transaction costs must be less than the dividend. So which one is more accurate and why? Once again thank you for responding to my question