Exercising call options for the dividend

Some myths die hard.
Some never die.

Here’s a comment from a reader:

I read a few of your online articles about when call owners should exercise to capture the dividend. It sounds like it makes sense, but I can’t reconcile this information with other material I read online such as:

Person A:
“I find, if a covered call has even a penny less than the dividend being paid [in time premium], I can be assured of exercise.”

Person B:
“I recently shared with a friend my frustration over early covered call assignment at ex-div. I have been called out early several times. The most recent time was on CTL. I had a call over a month out that was assigned early. That nice dividend was gone.

My friend put me in touch with a Dow Jones Newswire reporter who is writing a Wall Street Journal article on call volume spikes at ex-div….and the guy on the short side of the call.

He asked me to post his info for anyone who would like to tell of their own experience and frustration.”

Person C:
“You sound like you want have your cake (the time premium) and eat it too (the dividend). I think you should accept it as a virtual certainty that you will be assigned when coming into x-date if the time premium remaining is less than the amount of the dividend. Why would you expect that the holder of the contract you sold (the buyer) not want the dividend for himself? Since that person is usually a market maker (with a very low cost of doing business, including cheap commissions and a low cost of margin capital) you will usually be assigned.

If you get to just before x-date and you think you will be assigned you can always enter a spread order to roll the option to one less likely of assignment.”

Person B:
“I’ve traded CC’s for a long time but new to trading for the dividend income.
The CTL option was over a month out so I really didn’t think much about early assignment. I won’t make that mistake again.”

Person D:
“For stocks with large dividends, a call-holder will often exercise the option in order to capture the dividend. This will be done when the option is in-the-money and the Intrinsic value plus the forthcoming dividend exceeds the time value of the call.”

Perhaps these call owners are being exercised, but not for the reasons they think and only Wolfinger is correct?

Some people refuse to believe – despite the evidence

There are people on this planet who do not believe man has ever gone to the moon. There was a time when ‘everyone’ knew that the earth was flat – before discovering, and finally accepting, the truth.

The people you quote are wrong. And it is so easy to demonstrate that they are not only wrong (as anyone can honestly be), but they are stubborn and do not allow the facts to get in the way of their ideas. And you can prove this for yourself.

Person A is not telling the truth. I refuse to believe that he was assigned on a call option with 49 cents of time premium – when the dividend was 50 cents. In fact it doesn’t matter how big the dividend was. If assigned with that much time premium, it was a gift. It was free money. But person A does not understand how options work and discarded his gift.

He has probably never been assigned on an option with any time premium remaining, but this is impossible for me to prove. However, what I can do is prove that he is either the luckiest trader on the planet or just not telling the truth.

      :You can find real world scenarios, but I’ll make do with a fictional example.

      I used the calculator made available by the CBOE and ivolatility.com.

      Stock price: $53
      Expiration: April 15
      Dividend is $0.50
      Ex-dividend date: April 1, or 14 days prior to expiration
      Volatility = 35
      Value of March 50 call (on March 31, the day that the option must be exercised to collect the dividend): $3.27

      Note that the call has $0.27 of time premium remaining, and the delta is 84. Those numbers tell anyone that this call should NOT be exercised to capture the dividend. The downside risk is simply too great.

      When you exercise a call, you are buying stock and selling a call. That combination of trades is equivalent to selling a put – same strike and expiration date as the call exercised. And you sell it for zero, collecting the dividend as the only payment for that put.


The former call owner now owns stock, will collect the $50 dividend, and has something he/she did not have before the exercise: considerable downside risk. The stock is $52.50 (when the stock opens unchanged, it is lower than the previous close by the amount of the dividend.

The former stockholder, who is rejoicing – not complaining as your sample traders do – finds that his/her position is gone. That trader has collected all the time premium in the call option (removing all downside risk), but did not collect the dividend.

Instead, your former stockholders are bemoaning bad luck. All they have to do is open the EQUIVALENT POSITION (to the one held before being assigned). They do that by selling the equivalent put option. [If you are not aware that being short the put is equivalent to owning a covered call position, read this]

What is the value of that put?

In this scenario, volatility is 35, the stock is $52.5 and there are 14 days remaining before that put option expires.

    The put is worth $0.62. In other words, the person who was denied the $50 dividend can probably collect $60 for the put. The trader is better off by $10. That is truly free money. And the best part of being assigned that early exercise notice is that it’s not necessary to take the risk. The trader can be happy to have lost the dividend but be out of a risky position. It a choice: Take the free $10, wait for a higher price for the put (risking loss of the sale if the stock rallies), or be safely out with a profit.

This is not a bad choice. This is not something about which to complain. The people who are crying over the lost dividend never understood options well enough to consider selling the put. In reality they do not understand well enough to be using real money to trade options. Feel free to tell any of them that I said so.

Tristan: This explanation is basic to understanding options and how they work. If you don’t completely understand, please, think about it carefully before submitting a follow-up question. Understand this concept, and you are on your way to being a trader.

Trader B

Some options should be exercised for he dividend, even when one or two months remain. They are low volatility stocks paying a substantial dividend. To prove to yourself that volatility matters, look at the above example using a volatility of 18 instead of 35. You will discover that it’s (almost) okay to exercise. And most people would, even though it is theoretically not quite safe enough.

Person C

There’s not much to say. He talks big, but is option ignorant. The market maker would always sell the put instead of exercising. Any time the MM can get more than $50 for that put, it’s free money – when the alternative is exercising.

He is correct that if assignment is not what you want, rolling is one way to avoid it. But in given scenario, you should want to be assigned. It’s exactly the same as being given a free put option. You may keep that put (hold no position) or sell it.

Trader D

He would have been ok, if he had stopped sooner. His first sentence is true. The second is gibberish.

Tristan: Wolfinger is not always right. Nor is everyone else always wrong. You merely quoted four people who know not of which they speak/write.


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39 Responses to Exercising call options for the dividend

  1. James 03/28/2011 at 9:25 AM #

    Hi Mark, I have a question if you could answer it would be greatly appreciated.
    What is the difference of “buy put to open” vs sell naked puts? I know you must be a 4 level but is there an advantage?

    Thanks James

    • Mark D Wolfinger 03/28/2011 at 10:08 AM #

      Hello James,

      There is zero relationship between the items you want compared. Zero.

      1) “Buy put” is a trade n which you purchase a put option

      2) “to open” means that the trade is ‘new.’ You are not buying a put that you had sold previously. You may be buying this put for the first time or adding to a position in which you already own some of these puts.

      The opposite of ‘to open’ is ‘to close.’ And that refers to a trade in which you are selling options that YOU ALREADY OWN. You are reducing, exiting, or closing a position already in your portfolio.

      3) ‘Sell put” is obviously the opposite of “buy put.” it refers to a transaction in which you sell puts.

      If you already own the puts, then you are ‘selling to close.’ This is not a level 4 trade.

      If you do not own the puts you are selling, then you are ‘selling to open.’ When you ‘sell to open’ put options, you are selling them naked. That is (foolishly) considered to be too risky for most traders and that’s why it is level 4.

      When you ‘sell to open’ call options, if you own 100 shares per call sold, then you are ‘covered’ and it is not a naked sale and is not a level 4.
      When you ‘sell to open’ call options’ and you do not own stock, then it is a naked sale and most brokers do not allow that.

      James – there is no ‘advantage.’ One of your trades is a purchase and the other is a sale. They are not related. Think of the difference between buying and selling a car.

  2. Robert 03/28/2011 at 10:53 AM #

    In my ‘paperTRADE’ account I started to sell weeklys CC (I think in real trading I would go with monthlys) in order to get some exposure.
    On Friday I owned 1000 USO against which I sold 10 calls expiring March 25; USO ended at 42.18, with calls 0.18 in the money. Today I checked my account and the shares are still there. I am really surprised by the fact that the options did not get exercised. On CBOE site I read that the options on ETFs are American style so the shares should be removed. Am I missing something here?

    I started to feel very uneasy using ‘training’ accounts if their behavior has nothing to do with reality.

    Any suggestions what type of virtual trading would not have these issues?


    • Mark D Wolfinger 03/28/2011 at 10:59 AM #


      I am starting to believe that paper trading accounts are badly set up by many brokers. I was totally unaware of that. I knew that trade execution prices were bad, but I had no idea that there were other problems.

      Sadly, you must call the broker in question and ask whether paper trading accounts are ignored when it comes to exercsie/assignment at expiration. If they admit that they are ignored, a good follow-up question would be: How am I, the beginner, supposed to learn anything if these accounts have no similarity to reality?”

      If you do ask that question, please let us know their answer. And feel free to identify the broker. I’m just called IB and they DO remove ITM options from the paper-trading account as if they were really exercised (or assigned).

      Of course, we must remember one thing – these are not REAL options, so it is not possible to receive an assignment notice.


      • Robert 03/28/2011 at 4:46 PM #

        I am using tradeMONSTER, found through CBOE site. I sent them email with the questions regarding assignment and fills. I will let you know what they say (if they respond).


      • Robert 04/01/2011 at 4:33 PM #

        I got a response from tradeMONSTER: “The main purpose of our Paper Trading Platform is to learn how to navigate the functionality of your platform…not to trade/or practice strategies”. I must admit they have a valid point but it leaves us with literally paper trading where one has to write down what one would buy and/or sell, for what price and when.


        • Mark D Wolfinger 04/01/2011 at 8:09 PM #


          Learning to use the platform is one good reason to paper trade. I’ve mentioned that. However, designing these accounts to make it almost impossible to practice trading or to experiment with sophisticated ideas is just foolish on their part.

          I would still use their platform to make and manage the trade. Why? You an use the risk software and that’s valuable. I agree that would make it necessary to adjust execution prices for any trades.

          When I make the first Track that Trade – I’ll be forced to estimate fill prices.


  3. Libor 03/28/2011 at 4:50 PM #

    Hello Mark & Robert,

    If I’m not mistaken broker might be correct and stocks remain on your account. That might happened if option buyer gives-up its exercise right (there is not request to get underlying). If you get “lucky” and random assignment rule will NOT elect your account for assignment then stocks remain on your side (even partial assignment is possible).

    Chances to get into this situation in real trading is quite small but possible. I know some people who experience this with partial assignment.

    Only if skip assignment will repeat many times on paper account then I would get suspicious about correct algorithm implementation there.


    • Mark D Wolfinger 03/28/2011 at 7:12 PM #


      No. In this case you are not correct. This is a paper trading account. No ‘real’ options were sold. There was no real person who bought the options and thus, there could never be anyone who exercises the calls. In turn, that means no assignment notices could be issued.

      To preserve the appearance of reality, the broker should force a ‘pretend assignment notice’ on these ITM call options.

  4. Robert D. 03/28/2011 at 7:55 PM #

    In the case of Trader A having his call assigned and then buying the 50 strike put, shouldn’t he wait until after the ex-div date to sell that put? My thinking is that he can collect a larger premium after the stock price drops by 50 cents.

    • Mark D Wolfinger 03/28/2011 at 11:11 PM #


      Trader A is assigned on his call. He learns of that on ex-dividend day.

      He does not buy the 50 strike put. He sells it.

      Once the stock goes ex-dividend (as it does when it opens for trading that day), it is already ‘after ex-dividend date.’ There is no need to wait another day. The stock price has already declined by that 50 cents.

      I’m sure you get this. Perhaps you are not familiar with the ex-dividend rules.


      • Robert 03/29/2011 at 3:42 PM #

        Thanks Mark. I mistakenly typed “buy” instead of sell. 😛

  5. Sam Putnam 07/07/2011 at 8:11 PM #

    Both retail and market makers have until 4:30 on the day prior to ex-dvd to sell the stock ex-dividend as if it was the next day. However, the trade is backdated as if it occurred prior to 4 pm on the day before ex-DVD. As long as the time value is less than the dividend by some amount to cover costs and provide some profit, the computers used by market makers will exercise after the 4pm sale as the price is known and there is no risk. Retail investors may leave money on the table as they may not understand the rules. Is this your understanding why this can be a risk less trade?

    • Mark D Wolfinger 07/08/2011 at 7:03 AM #


      It is my understanding that
      a) If the trade is made after hours – as you say, until 4:30 – then I agree that the trade is considered to be made during regular hours – or what you refer to as ‘backdated’

      b) I disagree. Exercising an option for the dividend when the ‘time value is less than the dividend’ is a losing strategy. There must be zero time premium for the exercise to be a money-saving trade. When there is some time value remaining, you will discover that when the stock goes ex-dividend the following morning, the stock can be bought and the option can be sold – such that the time premium in the option is greater than the dividend. That means exercise collected only the dividend, while making the trades that are equivalent to exercising (sell stock and buy call) offers more cash than the dividend.

      c) There are not ‘rules.’ These are ‘best practices. Yes, retail leaves plenty of cash on the table when they forget to exercise calls for the dividend.

      d) I don’t know which trade you believe is riskless. Please elaborate.Exercising for the dividend is NEVER riskless. If the stock tumbles below thes trike, then the exercise turns out to be a losing trade.

      • Sam Putnam 07/08/2011 at 4:52 PM #

        A) to be clear, assume 7/7 is the day before ex-DVD day. The market maker can sell the stock between 4 and 4:30pm for trade date 7/8 ( no dividend) and know the sale price. He then exercises the ITM call as if the trade date was 7/7 as permitted if notice is given prior to 4:30 on 7/7 and captures the dividend of say 0.50 with remaining time value of say 0.27, netting 0.23 advantage. There is no risk as there is no open position.

        B) since early exercise happens all the time on the day before the dividend if the time value is a bit less than the dividend, you must believe the computer models used by market makers are wrong and they are writing checks to retail.

        C) without the sale and backdated call exercise rule, there would not be a best practice.

        D ) see answer for A)

        I hope I was a bit clearer in this post. Thanks for your input

        • Mark D Wolfinger 07/08/2011 at 7:24 PM #


          I admit to being off the trading floor for the past 11 years, but there are some things that don’t change.

          The 23 cent advantage that you see is an illusion. It is very likely that the stock can be bought (next day, no dividend) and the call sold. The call should have a time premium of roughly 73 cents. That’s the equivalent of collecting the dividend plus the 23 cents. When the MM exercises, he forfeits the 23 cents and only collects the dividend. How is that a gain and not a bad decision?

          1) I do NOT believe that market makers exercise options with residual time premium. Why do you believe that they do so?

          2) When you buy/sell stock after hours, it is my understanding that you are NOT trading it for the next day. You are trading it today, or 7/7 in your example.

          3) Agree that there is no risk and no open position. Do not agree that the MM gets to sell the stock in after hours with no responsibility to pay the dividend.
          In my opinion, MM locked in nothing but a loss. It is my belief that had he waiting until the next morning – he could have bought stock and sold the call (equivalent to exercising) – collecting more than the value of the dividend. That makes it better than exercising when there is time premium remaining in the call option.

          I understand what you are saying. As far as I know, you are not correct. I am willing to be shown otherwise.

          4) The 23 cent advantage that you see is an illusion. It is very likely that the stock can be bought (next day, no dividend) and the call sold. The call should have a time premium of roughly 73 cents. That’s the equivalent of collecting the dividend plus the 23 cents. When the MM exercises, he forfeits the 23 cents and only collects the dividend. How is that a gain and not a bad decision?

  6. Sam Putnam 07/08/2011 at 5:39 PM #

    If the stock trades up (adjusted for the dividend drop) between 4 and 4:30, the more profit for the market maker. If it trades down, the call may not be exercised as the time value will increase. Clearly, if the stock was up 0.30 adjusted for the dividend, the market maker is better off vs the pre-4pm value of 0.27.

    • Mark D Wolfinger 07/08/2011 at 7:30 PM #


      You are assuming that the MM is naked long the call. That is why he/she can sell stock and then exercise.
      So if the stock rises in after hours, that is more profit for the market maker – because he owns the call.

      The normal situation is that the MM is long the call and short the stock. Your scenario has the MM llong the call, period. Of course he earns a profit when the stock rises. He is naked long.

      If he were long the call and short the stock, a hedged position, it would not matter where the stock trades in after hours, as long as the call is deep enough ITM to be a good exercise. With 27 cents of time premium, it should not be exercised.

      As I say,. I am willing to be convinced otherwise, but I believe it is easy to learn whether MMs do exercise in this situation. Just find an option that meets your criteria and see how much the OI decreases the night prior to ex-dividend. I say it does not decrease by much. You say it does.


  7. Sam Putnam 07/08/2011 at 8:34 PM #

    I need to think about the impact of the MM hedged position and How to profit from it as a MM. I have had many early exercises before the dividend was paid. The question is what advantage the MM has that is not obvious to either one of us. I read in the WSJ that MM do not net long and short call positions in the same option. This is not true of retail where this is a closing transactions. I am not sure how this would give the MM an advantage, but I am sure it does.

    We both agree that a few cents of time value would be early exercised prior to ex date. If not, I could own the stock and sell a fairly deep ITM and capture the dividend with much less downside risk then just owning the stock (but no upside of course). Likewise, if time value is much greater the dividend, there is no chance of early exercise. The open question is what is the relationship, if any, between the dividend and remaining time value.

    Also if the stock is unchanged (less the dividend), the call option price (not the B-S implied volatility which is flawed for dividend-paying stock) should be unchanged all being equal. Otherwise, I buy the stock, sell the deep ITM call, keep the dividend and buy back my now lower priced call because of just the dividend and sell the stock. A dream of dividend capture, but cannot be true.

    Thank you for your insights.

    • Mark D Wolfinger 07/09/2011 at 9:32 AM #


      Many times the options should be exercised for the dividend. The question is whether those options had any remaining time premium.

      In a practical sense, there is also the question: Could you have repurchased stock the following morning, sell the call on which you weer just assigned, and come out ahead. You come out ahead only when the time premium in the option exceeds the dividend plus your trading costs. If you have never bothered to check those numbers, you can begin now. It will take some time, but at least you will have some useful data.

      Advantage? The advantage is obvious. Just think about it. When the options should be exercised for the dividend (say 50 cents), then the following morning, when the stock opens ex-dividend, if the time premium in the option is LESS THAN THE DIVIDEND, then everyone who exercised prevented a loss by exercising. That’s the advantage. It is to prevent owning an option that will be worth less tomorrow than it is today. Today it is worth the dividend. Tomorrow it may have a small time premium. Those who did not exercise gave up the dividend in exchange for the small (less than the dividend) time premium in the option.

      The WSJ is incorrect. No MM an be net long and short the same option at the same time. Then buy or sell to open and then reverse the trade ‘to close’ just as you do. I guarantee that this WSJ article is incorrect. However, there is a situation that may have been described. If the MM buys 100 calls and immediately exercised them, then he no longer owns long the call. Thus, if he then sells 100 such calls, he has a short position. So he did, in effect both be long and short the same option – but not SIMULTANEOUSLY.

      We do not agree. It is wrong to exercise an option for the dividend that has any residual time value.

      No, you could not do as you say. The ‘fairly deep ITM’ option will have no time value and will be exercised by its owner.

      The relationship between the dividend and the remaining time value: Use a calculator. Determine the time value for the option the morning of ex-dividend day. That time value depends on two major factors: the volatility of the stock and the time to expiration. If that time value is greater than the dividend – then anyone who exercised for the dividend lost money. He lost the opportunity to buy stock (no dividend) and re-sell that call, collected more than the dividend. Of course there is downside risk when you own stock, and that is why the volatility of the stock comes into play. It is also whey how ‘deep ITM” the option is. You do not want to collect the dividend only to see the stock drop below the strike. The option owner had a limited loss. The stock owner does not.

      Your last paragraph loses me. If you buy stock and sell the call – you do keep the dividend. But the stock is priced 50 cents lower. You get the dividend, but you lose on the stock price. That’s the way it is supposed to work. There is no inherent profit from collecting a dividend. If you do as you say, buy the call, paying a small time premium and sell the stock, you have captured nothing. All you did was buy the synthetic put option, paying a small price to do that. It ‘cannot be true’ becasue it is not true.

      For option traders, there is a possible loss when forgetting to exercise a deep ITM option. For the covered call writer, the only chance to gain comes when an option that should be exercised is not.


  8. Sam Putnam 07/09/2011 at 1:41 PM #

    I guess the best way to proceed is to find actual examples of early exercise. Your thought on checking OI pre- and post- dividend is a good one, but of course the ex date could be a busy one for new positions.

    My thought experiment on why the price of an option cannot change because of a known event such as a dividend payment (and no other price change except ex-dvd) would imply an increase in time value (and I have seen this in practice) as the next early exercise date is 3 months away. Generally, this will now exceed the dividend paid in total, that is, I cannot buy back my short call and do true dividend capture. This was the point of my last paragraph that may be hard to follow as my only hope of dividend capture is thru a lower short call option price which of course cannot be true. I would be whole on the stock as I would get the dividend as you suggest.

    Again thank you for your patience and thoughtful replies.

    • Mark D Wolfinger 07/09/2011 at 8:07 PM #


      Yes, it is a busy day for new positions. However, if the option is truly a good exercise for the dividend, then OI will move near zero. If OI does not decline severely, then you can see that most people did not exercise.

      It is possible that such data is available from the OCC, but I have no idea. You can ask: options@theocc.com
      The question would be: Do you have OI information for options on the morning of ex-dividend date?

      My pleasure Sam

      Good trading.

  9. Sam Putnam 07/10/2011 at 3:37 PM #

    Thinking a bit of the hedged MM position, I can make the following observations. To begin, let’s assume the stock is $50 with a 4% dividend, I.E., 50 cents per quarter. I am long the stock and short a call with a .80 delta. The MM would have a delta-neutral position, short .8 shares and long the call. If the stock truly drops 50 cents, the short only gains 40 cents. Unless the MM is short 1 share per call, 10 cents is left on the table. Now for the issue of negative carry. In bonds, it is simple with daily accruals and a coupon payout. I like my position as I earn a bit more than 4% annually with comparable short-term rates below 0.25% if I stay above the strike. Likewise the MM has negative carry of 3.75% annually completely offset if the stock drops 50 cents per quarter and does not recover as else being equal. Does a stock recover the lost dividend over the course of the next quarter? It is impossible to measure given the volatility of the market. The point of all this is how much premium should a MM give up to get out of a position with no bid/offer spread. Hopefully, we can find this value by example.

    • Mark D Wolfinger 07/10/2011 at 8:51 PM #


      The MM should give up zero premium. When long the call and short the stock, the MM also sells the put. That completes the riskless (except for pin risk) reversal. All the MM has to do now is to BUY THE PUT for LESS THAN the dividend and then exercise the call.

      If the put cannot be bought at a low enough price, then the call should not be exercised for the dividend.

  10. Sam Putnam 07/18/2011 at 11:06 PM #

    What is the cost to the MM of this perfect hedge (less pin risk)?
    The short stock position pays the dividends
    The short stock positions pays a daily borrowing fee
    The position may result in a credit position that pays little in current environment
    The MM gains the put premium if the trade is held to term and finishes above strike
    The MM losses the time value of the call

    Using COP 60 call 1/21/12 mid 15.97 stock close 75.44 60 put mid 1.5 0.66 dividend paid twice
    MM proceeds= 1.5-.66-.66-.53. A net loss of 0.35 offset by interest credit on the position for all stock prices

    For the buy writer if stock stays above 60, .66 +.66+.53 in income

    Am I missing something?

    • Mark D Wolfinger 07/19/2011 at 7:53 AM #


      I hope you can appreciate that I am no longer publishing this blog and simply do not have the time for lengthy replies.

      a) There is no ‘cost.’ The market maker makes the best trades he/she can at the best possible prices. If they are patient (and thus, holding risk), they will get better prices. If in a rush to hedge (as I believe they are), then raise their bids o the options they buy, hoping to get them at a favorable price. There are no guarantees that they will be able to buy/sell what they need to buy/sell at a good price.

      b) Dividends do not matter. They are built into the option prices

      c) The phenomenon of paying a borrowing fee is new. We always collected interest when short stock. When fees are paid, those fees must be priced into the trade. MMs will not make the trades described if there is no profit in it for them.

      d) if it pays ‘little’ then it pays little. The MMs are not going to refuse ‘little’ in exchange for taking more risk

      e) Gain the put premium ? Lose the call premium? Why does that matter? It is all priced into the trade. The numbers work or they don’t. If they don’t, the trade is not completed. Alternatives are found

      f) I cannot check your calculations. Not all of these reversals are profitable. If not profitable, then no one makes the trades. Some stocks are easier to borrow than others. Some cannot be borrowed so option prices are out of whack. I have no idea about this specific case.

      Using closing prices for calculations is futile and a complete waste of time.
      Use live prices only.

      If the net loss is 35 cents, how much is the interest?


  11. Sam Putnam 07/19/2011 at 12:32 PM #

    Using 5 bp the interest offset is 14 cents ( not included in the 35 cents ) however any borrow fees would increase the loss. For some reason , put- call parity does not seem to apply for higher dividend stocks. The buy write is favored as implicitly the option market seems to forecast dividend declines which has not been the case. I hope to report back on OI changes and put an end to this thread. Thank you for all your input.

    • Mark D Wolfinger 07/19/2011 at 3:18 PM #

      Keep in mind that sometimes the call is exercised for the dividend, and that changes the P/L picture for each party.

      Thank you. OI data may not tell us what the ‘best’ thing to do is – but it will describe reality, or what real people are doing when faced with the exercise decision.


  12. Sam Putnam 07/20/2011 at 7:49 AM #

    I forgot to mention I used the mid-point of the closing bid/offer spread, not the last price which may be not meaningful. I am gathering OI data on COP.

    • Mark D Wolfinger 07/20/2011 at 9:51 AM #

      Hi Sam,

      I never trust closing prices, or closing bid-ask spreads

      In addition to OI, don’t forget to take a look at the ITM calls and which have time premium.
      Also, get DELTA of these options. In general, a delta of less than 100 tells me that the option should not be exercised.

      Next, as early as possible on ex-dividend date, get the bid/ask for the options, the stock price and the net stock price change. Obviously you will also get the OI numbers – but there is no urgency on those. OI data is updated only once per day.


  13. Sam Putnam 07/21/2011 at 10:52 AM #

    My 1000 shares of COP were call away with a Jan 2012, 60 strike. The remaining time value was between 29 and 49 cents with a 66 cent dividend not received, of course. The delta was .94 and the put quoted 1.33/1.37. The OI dropped from 7059 to 7017. Perhaps this was an non-optimal assignment, but it happened. I will post my OI analysis tomorrow.

    • Mark D Wolfinger 07/21/2011 at 2:26 PM #


      I am amazed, and the OI suggests this was atypical.

      I just looked at the quotes. You can buy stock and sell the same call, collecting the intrinsic value + 77 cents.
      It’s not a huge win, but I think that you are out of the trade early and can invest elsewhere for a better return. And, as a bonus, if you prefer, you can re-enter this trade, keeping an extra $110, less commissions.

      Looking forward to analysis.

  14. Sam Putnam 07/22/2011 at 2:33 PM #

    Study of COP day before ex-date, 66 cent dividend
    AUG 65/67 7% remaining all should be gone since put is far less than dividend
    70 call strike 2848 to 1654, put value roughly equal to dividend indifference price
    72.5 6460 to 6317 put 1.19 not optimal exercise
    SEPT OI increased
    NOV OI little changed 55 call 20 to 10 OI put worth 46 cents
    JAN 55 volume huge 20,400 OI 3354 to 2815 put worth 80 cents volume a puzzle to me
    60 strike my 1000 shares called away, but not optimal
    Longer dates little changed
    Traders do make non-optimal choices, but in small size for covered calls

    • Mark D Wolfinger 07/22/2011 at 4:36 PM #

      Thanks. Your time and effort is appreciated.

      One clarification in your last sentence.: They do make non-optimal choices,and we can assume the strategy is a covered call – but we do not know that for a fact. What we do know is that some options get exercised when they ‘shouldn’t’.

      7% seems high to me. Some customers made a mistake by not exercising.

      Aug 70 and higher, clearly not an optimal exercise. People are willing to take a lot of downside risk – just to collect a dividend.

      Jan 55 call volume may be part of a dividend play. Did the Jan 50 call also have high volume? Yes, volume seems out of line.

      This is a good study. Thanks

  15. Sam Putnam 07/22/2011 at 7:30 PM #

    The 50 call had a volume of 8300 with a 213 OI, high relative to remaining position on 7/20 close. This should end the thread, but I will post any early exercise in my personal account to document real trades.

    • Mark D Wolfinger 07/24/2011 at 9:15 PM #

      Thanks for the time and energy.
      Valuable input.
      Be well and good trading

  16. Nhou 08/04/2011 at 5:02 AM #

    Hi Mark,

    If I am buying a call on option and I am buying out of in-the-money, let say $.12 a share before ex-date, then keep till rec-date two days later. Do I still get the $.42 dividend pay from the company. Your answer is much appreciated

    • Mark D Wolfinger 08/04/2011 at 8:13 AM #


      When you own a CALL OPTION you NEVER get the dividend.
      Dividends only go to people who own STOCK.