Hello, I found the above text on the internet and wonder something about the call options the day before ex-dividend date. My thought is for the OTM call options. As we "know" that the price of a stock most likely will drop in price on the ex-dividend date, - what I am thinking of is to create an OTM call creditspread in hope that the sold call option will loose enough value to make the creditspread profitable. Now I wonder if implied volatility is high for the call options on the day before the ex-dividend date and/or any thoughts about this? Am I thinking correct? Am I missing something?
I expect that if you find that on your platfrom, that your platform is not properly imputed dividend flows in their calculation. There is no money to be made from volatility trading from dividend flows that are known.
@Robert Morse is correct... dividends are already incorporated in options pricing. Usually the dividend is proposed on an earlier date... so just before ex-div it's all priced in. The only reason the IV would be higher before dividend, is when the company has an earnings release just before as well, but I can't remember that happening. I do know German companies have their Ex-div date the day after their AGM, which might cause a slightly higher IV. That said, ITM call options are basically exercised before dividend, depending on how far ITM they are, amount of dividend and the value of the same strike put etc... So basically those ITM call options trade like they are about to expire and usually close to expiry the IV's are a lot higher than say 1, 2 weeks before expiry. So maybe that's what you're referring to? In that case, you can't really profit from it, since you will be assigned before ex-div.
I looked an example on 22 November. I look at prices in Think or Swim and I think I could see a profitable example: Symbol: VOD Vodafone Group Dividend payout: 0.488625 Date: 11/22 Stock price: 24.49 Dividend Yield: 8.20% Now, the closing price for the underlying on 11/22 was: 25.18 I then create a call credit spread with strikes: 26 and 27 (Above stock price) which is OTM and not ITM. Below are the whole calculation. Lets assume that we open this creditspread 10 minutes before close and get those values. Then assume that we exit the trade on the open or minutes after open. I have calculated what the optionprices approximately could be on the open on 11/23 using the delta values from 11/22. As seen from the calculation we receive a net premium of 22 dollar. On next days open the options net premium has a value of 8 dollar which should mean a decent profit? _____________________________________________________________________________________________ Calculation Call credit spread: 11/22 Last Stock price: 25.18 Sell strike 26 for 0.48 (with delta: 0.37) Buy strike 27 for 0.26 (with delta: 0.22) Premium: 48 dollar - 26 dollar = 22 dollar 11/23 Open stock price: 24.66 Price change in stock: 25.18 - 24.66 = 0.52 Approx calculated changes in options prices looking at the delta where we also have 0.52 dollar change in underlying: 0.52 dollar * 0.37 delta = 0.1924 = new option price: 0.48 - 0.19 = 0.29 dollar 0.52 dollar * 0.22 delta = 0.1144 = new option price: 0.26 - 0.11 = 0.15 dollar Current Premium: 22 dollar - 14 dollar = 8 dollar
No... not correct... Firstly, Vodafone went ex-div on the 22nd. So you need to look at 21st prices... So close on 21-11 was 25.44? So next morning opening would be 25.44-0.49 = 24.95 (if unch opening). It actually opened on 24.91 I think. Secondly, the options pricing on the 21st would be roughly as follows: OTM calls are based on ex-div stock price of 24.95. So 26, 27 etc are all not to be exercised pre-dividend (OTM!). ITM calls where the put with the same strike price has a value of less than the dividend (<49ct) are to be exercised and hence are valued on the cum-dividend stock price of 25.44. The 24 call therefore would have a value of 1.44. The 24.50 put value was slightly higher than the dividend, so the 24.50 call would've been based on ex-div stock price, but with a small extra premium because a small stock swing can make this call an early exerciser as well... basically going from delta 60 to delta 100 in seconds (large gamma!!!). Same but less for 25 call. So.... with this new info... do your maths again. But I can tell you already, there's no free lunch... ain't going to happen. That's what @Deuteronomy_24_7 meant.
On the left values for call when exercised cum-dividend, compared to values of the call if not exercised. You can see, the 24 call should be exercised and the 24.50 and beyond not. Based on spot = 25.44, dividend 0.49, maturity 25 days, IV ATM 31.5
I try to break 3 questions I have down: 1. Yes you are right, I was looking at the wrong date. Doing the math again, it seems that the dividend is priced in on the day before ex-dividend and it should be impossible to make profitable trades from day before ex-dividend to next day? 2. As you say and as I heard a few times, - looking at the put price which has a value of less than the dividend (<49ct), then this call are to be exercised. What is the logic with that, why is it so. What does it actually mean when 49c is less than the dividend and therfore the call will be exercised? 3. As I have learned with ITM calls as above on the day before ex-dividend. Now I wonder about ITM calls in general. Will all ITM calls always be exercised or is this a specific rule Just on the day before ex-dividend date? I think I red but are not sure that in general ITM calls will in 99% be exercised on the expiration date?