I'm just curious if anyone has ever actually been the beneficiary of a counterparty that didn't do the obvious and exercise an ITM option with a dividend that made exercise optimal. I can see a retail guy not getting it every once and a while so you make a few bucks off his 100 shares or something, but curious if anyone has actually seen this happen for real in any significant way.
Keep in mind that when the stock goes ex-dividend, its price typically drops by the amount of the dividend paid. For example if the stock's price is $50 and the dividend is $1.50, on ex-dividend date its price will be $48.50 ($50 - $1.50). This downward adjustment is made by the exchange itself. Of course, the ITM call option will also drop by the same amount ($1.50 in this example).
A minor correction, the exchange doesn't adjust the price of a stock when it goes ex. The market values something by $1.50 less that is now worth $1.50 less than it was yesterday, so the price typically drops based on market forces. Not always, however, something else can always impact the market's view of the stock so it opens at a different price, but you're right it's always reflecting that loss of the dividend value from the day before. I'm specifically talking about the (almost) risk free arbitrage that happens when you buy a stock that's going ex-dividend and also sell a deep ITM call for the same stock. The next day if you're not assigned on the call, you'll get the dividend, $1.50 in your example, on the stock you own and for arguments sake let's say the stock also falls by $1.50 so you're netted out to zero on that position. But, at the same time, the call you sold will drop by $1.50. Because the call owner isn't entitled to the dividend, that gives you a $1.50 profit. And almost no risk because your long position and short call exactly balance each other out otherwise absent a rise in volatility that happened to occur that overnight or such a dramatic fall in the stock price overnight that your ITM call becomes OTM in which case your continued losses on the stock are no longer absorbed by gains on the call you sold. Because of this, the person who bought your call will almost always exercise it prior to the ex date, otherwise they're just losing $1.50 for no reason. I'm just wondering if anyone has ever had an experience where the call holder didn't exercise and allowed you to make the almost risk-free $1.50, or however much it happened to be.
The key word here is "almost", so some options will NOT be exercised. That means this covered call strategy might deliver consistent results if done repeatedly before ex-dividend date, assuming the trader has enough capital to buy different stocks to write calls on. Of course the trader must select (above-average dividend) stocks that are in range mode or trading sideways, not trending stocks.
Yes, that's exactly my question. Has anyone actually had experience with the "almost" and found someone who didn't exercise? I haven't, but I haven't tried it enough to be statistically significant. I'd be interested to hear from anyone else who has.
Look at the near term 1-60 days option open interest in the ITM calls the day after X-date. Look at the ITM strikes were the dividend is worth more than the puts on that strike and you will see there are always some customers that do not exercise. The cost of fighting for that opening interest is too high to play this game as a customer.
That might be true, the markets are efficient enough so they will probably already price in the dividend in the call option's premium, in advance. And this of course might take away some of this strategy's edge. Personally I have not tested this covered call approach, so I am only guessing.
It can't really be "priced in" if you look at how the play works. Robert was just saying that the percentage is so low that if, say 100 shares out of the 10,000,000 covered by open options fail to exercise and you have 1,000 shares, your expected value would be 1 of your shares not covered, which using your example would net you $1.50. So not worth tying up the capital or the commissions to buy 1,000 shares and write the equivalent number of call options to get $1.50 out of the deal (note I'm making up the numbers to make the point, I'll need to look to see what the percentages really are).