Sell deep ITM Covered Call on dividend security

Discussion in 'Options' started by aquavelva928, Aug 25, 2013.

  1. Hi All,

    Am new to the board and generally new to investing. I have a question about ITM calls on a dividend security.

    If you were to buy a security that pays a dividend and sell deep ITM covered calls on it spaced way out in time (e.g. January 2015), why would the holder of that call exercise before expiry?

    Generally speaking, leading up to the ex-dividend date, the security price adjusts upward by the dividend payout. Then, on the ex-dividend date, the opening price is the closing price of the previous day minus the dividend payout.

    So the exerciser of the call would have to wait to end of the day prior to the ex-dividend date to get his dividend payout. But then the next day it loses that. So, it is a zero-sum game. Is that analysis wrong?

    Perhaps there is a nuance or trick in the bag that I am missing?

    All feedback appreciated.