SPY Dividend Trade Snafu

Discussion in 'Options' started by hschwartz, Sep 21, 2012.

  1. 2.4million in-the-money SPY calls were candidates for early exercise ahead of today's 78cent ex-dividend event for the widely held SP500 ETF. Total dividend proceeds available to the long-call holders was nearly $170million. As expected, call volume in SPY on Thursday was several times the normal level as nearly 6million contracts traded in the 'dividend stripping' strategy employed by a small number of traders. The trade involves buying and selling massive blocks of calls among counterparties, with each exercising the new long positions to effectively divert the un-exercised portion of open interest to their accounts. Normally we see about 8% of the eligible calls go unassigned in SPY, which would have yielded about $13million in profits to the traders involved. But this morning's SPY open interest data shows an unusually large share, 24%, of the calls were not exercised , which works out to more than $35million for the traders who successfully implemented the trade. Sources on the floor are telling us that the unusually low exercise percentage in SPY yesterday was the result of a mistake or clearing error on the part of one of the pros involved in the dividend trade, suggesting this seemingly 'riskless' operational arbitrage was anything but safe, and one trader may be looking at a 20-something million dollar loss today