1. You wouldn't be able to make profits from arbitrage opportunities... of course you could make a profitable trade, but this doesn't have anything to do with dividend. 2. It's all about put/call parity. Basically, an ITM call is exactly the same as the same strike OTM put + 100% stock. Spot = 100; the 80-call with delta 70 = 80-put with d30 + 100 stocks. They have the exact same payoff and hence are the same. That's how MM's hedge etc. So, looking at VOD 23 strike. 23-put = 0.19. If you wouldn't exercise the 23-call before dividend, the value would be 2.14 the day after. Put/Call parity: ex-div spot 24.95, 23-put 0.19, 23-call = (24.95 - 23 + 0.19) = 2.14 Day before dividend this 23-call = (25.44 - 23 + 0) = 2.44 ..... (the 1 day 23 put = no value left) So that's why you exercise, because if you don't you will lose 2.44-2.14 = 30 cents Which is also the difference between de dividend and the value of 23-put. (0.49 - 0.19). Basically, if you keep the call, you lose the dividend and gain the put value. If you exercise the call, you get the dividend through the new +stock position, but lose the put value. So when the put value is the same as the dividend, you neither lose nor gain by exercising before dividend. (ps. normally you should also account for interest, but that's very low now and I don't want to elaborate on it... you should get the picture by now) 3. Kinda the same. If you don't exercise the ITM call on expiration you lose the intrinsic value... Cost-wise you might not exercise when the call is only 1ct ITM.... The risk for being short the ATM call or put, when the stock closes exactly on your short strike, is that you don't know what position you have the next day. This is called 'pin-risk'.
I have trouble to follow your example. Is it possible to simplify this? First your values seems wrong if you look at date 11/21/2015 for vodafone? - The spotprice in TOS is: 25.51 - The 23 put price is: 0.28 I found this formula for put/call parity: C + PV(x) = P + S ------like this------- call option price + strike price = put option price + stock spot price If I look at strike price 25 with MIDPOINT prices. It could look like this (Here the interest might differ?) 0,905 + 25 = 0.85 + 25.51 25,905 = 26,36 I wonder if this calculation is correct? I think I need to open a thread only for assignment to really understand it better.
My options prices were just examples since I didn't want to spend time to look up 1-week old data. The do hold though re P/C-parity. C + PV(X) = P + S 2.14 + 23 = 0.19 + 25.44 2.79 + 23 = 0.28 + 25.51 It doesn't matter for P/C-parity... that's the thing... don't look at midpoint prices for P/C-parity because the midpoint isn't necessarily the 'correct' theoretical value. You could, but then look at the one with the lowest spread. In your example when you take spot = 25.51 and compare it with the 25 strike calls and puts... That 25 call is not to be exercised, since 25-put > dividend... so on this strike both the put and the call are to be related to the ex-dividend current spot. So spot = 25.51 minus 0.49 = 25.02 C + PV(X) = P + S 0.905 + 25 =(not) 0.85 + 25.02... now P/C-parity doesn't hold, the call is 0.035 too high. It should be: 0.87 + 25 = 0.85 + 25.02 This is because of three things. - You take midpoint, which is inaccurate as I said before. - Secondly, there is an small extra premium added to the call because it has extra gamma due to the possibility of it suddenly becoming early-exercise before dividend. (see my earlier post regarding jump in delta from d60 to d100). - 3rd, there might be people trying to evade paying dividend tax, therefore technically lowering the dividend in pricing options and this raises the synthetic stock (+call - put). If this is all too much to understand... meh... it takes time to learn stuff.
Looking at this example. Calls with strikes 20.50 - 24.00 basically have a time to maturity until the end of the day (early exercised) Calls with strike 24.50-27.00 and puts with strike 20.50-27.00 have a time to maturity until 16th Dec.