Do most long call holders exercise early to get the dividend?

Discussion in 'Options' started by noob_trad3r, Sep 11, 2009.

  1. Lets say you have a long call option in the money and the dividend is greater than the remaining time value.

    lets say dividend 10 cents, Time value 3 cents .

    technically you really are only getting 7 cents but you still have to go long stocks and the stock could easily drop 15 cents lower.

    Why would someone exercise early and go long stock just to get a dividend, it seems like a risky play with not much gain.

    Wont it be smarter to sell to close and make your profit vs taking a big chunk of stock and trying to sell it quick enough. Cause it could gap down the next day.
  2. MTE


    That's why you not only exercise the call, but also buy the same strike put. This allows you capture the dividend while still maintaining the same position as the original long call.
  3. Tom1am


    I have been wondering that myself. Thanks
  4. Wont the put be higher since the stock dropped in price ex-dividend?

    It seems like a lot of churning/commissions etc.. to try and grab a few pennies.
  5. MTE


    The actual calculation of whether to exercise to capture the dividend or not consists of the put premium plus the cost of carry to expiration. So the dividend needs to be greater than the sum of those two.

    It may be a few pennies, but if you can do it hundreds or even thousands of times, those pennies add up to quite a bit.

    Don't forget that pros get much lower commissions and interest rates than retail so for them it makes a lot more sense.
  6. This is a serious question. You must understand why the put will NOT be higher. It's a big part of understanding how options work.

    The ex-dividend date is known. It is not a surprise. Thus, every option 'knows' the dividend is coming and is priced accordingly.

    Calls that 'should' be exercised trade at parity and have zero time premium and 100 delta. And if the put can be bought at less than [the dividend minus the cost to carry], then it's a good idea to lock in those pennies (as already explained to you).

    Puts are priced as if the stock is trading lower (by the amount of the dividend), so the answer to your question is 'NO.' the put is not higher the morning of ex-dividend - if the stock price is unchanged (lower by div amount).

    The calls are also priced - knowing the stock will be trading 'lower' on ex-div date.