I am trying to figure out which of the ITM calls are candidates for early exercise. Dividend is around 50 cents a share and goes ex on friday morning. Cost of carry negligible, as expiration is friday. If that assumption is incorrect, pls advise. 105 puts went out today .25-.28 with .11 cents of theta. So assuming it loses its 11 cents tommorrow and goes out say .16. Would all call strikes underneath 105 also be candidates? How do I cover the short option that might be candidate? +c-p-u.....? Because the stock should theoretically open 50 cents lower..does any of this really make a huge difference. Thank you in advance from any of our regular contributors....Mav, dmo, riskdoctor, dagnyt, etc..
If the dividend is 50 cents and the put is available for significantly less than that [also add trading costs and cost to carry stock], then the call owner should exercise and buy the put. That's an equivalent position and free money. So yes, lower strikes should also be exercised. If you own the calls, do the smart thing - verify the ex-date and amount. Then exercise if appropriate. If youa re short the calls, what's so terrible about being assigned? Sure you pay the div out of pocket and somehow that feels worse than losing another 50 cents on the call, but the dollars are the same in the end. But if it makes you uncomfortable, then you will not want to stay short the calls and may prefer to roll them out one month. One advantage to doing nothing (if short the calls) is that you have a chance to 'slide' and not have to pay the dividend. Hope it works, whatever you decide, Mark
Thank you for your response. If it is smart to capture the "free" money if long, why is it that if assigned (on my shorts) that I shouldn't be concerned, you pointed out that the dollars are the same...I am not understanding or missing something. Could you answer specifically.. 1. Lets say for example short 10 spy 101 calls. puts went out .04-.05. I should be assigned right? Shouldt I sell covered combo.. +c-p-u and then I am not on the hook for the 50cents? 2.) If I'm long the 101 call.. I would want to exersice because capturing 50c div would be greater than .04-.05c + 1 day of carry. Thank you for your patience
No, there's little chance of "free money" in your example. Don't forget that you pay the div. if you are -u; and the div. is factored out of price of u. 1) If you +u covering all calls there's a small chance that some or all may not be exercised. The likely outcome is a 0 position. And still, there's some risk. A no risk solution is +c; or +p, +u 2) exercise c and short u; or - c. There's no free money here. Only way is to take on risk. There are some low risk plays, but the likely outcome is more comms and no gain.