If your calls are in the money, even barely, your options may be assigned right before the security goes ex-dividend—and then you may have a problem. If your short calls are assigned the night before the underlying goes ex-dividend you will wake up to find yourself no longer with an option spread, but short the security and half of your option spread remaining.
Call owners with in the money ITM options will typically exercise their options the evening before the ex-dividend date. Holding the calls through the ex-dividend would cost them money because the underlying security usually drops in value when it goes ex-dividend. In addition to assignment risk, the other thing to watch with ex-dividend dates is distortion in the implied volatility IV of options.
For example, the IV of deep ITM calls will be distorted because the market will not give you a profitable low-risk trade e. You can create this position, but the premium from selling the calls will be non-existent, and therefore only risk and no profit.
Notice the implied volatility of zero on the bid side of the SPY ITM options a few days before the security goes ex-dividend:. No easy money here. If you find yourself the day before ex-dividend with ITM short calls there are a couple things you can do:. For special dividends, option strike prices are often adjusted to protect option holders from unforeseen corporate actions.
For more see Profiting from Special Dividends. SPY dividend capture—June I trade in Brazil. However, sometimess our index futures are below the spot index due to the loan rate on the index components being higher than the risk free rate , and some american ITM calls on the spot index get exercised early, so in these ocasions american and european both available have different prices. You must get used to having lots of different strike prices.. Turquoise does the same for Russia originated depository receipts.
Would it be accurate to say the SPX call options still price in dividends the SPY would receive but cannot be called away due to being European-style? The SPX calculation does not make any adjustments for regular dividends, so there will be a subtle drop in the index when individual stocks go ex-dividend.
I doubt that calls could be used to capture this drop—if the drop was going to be considerable, say with multiple stocks going ex on the same day the option markets would probably compensate by lowing the IV before the ex and raising it on the day of. First the good news: Since you were short the security when it went ex-dividend you now owe the dividend on the security. That amount will be deducted from your account when the dividend is distributed. Your potential worst case loss from your position has been increased by that amount.
Do you have the margin in your account to support the short position in the underlying? There will be a deadline. Your short position exists, but actual shares have to be borrowed to sustain it more than a couple of days. Is your spread position in an IRA? If so being short a security is a definite problem—not allowed by the IRS.
You must cover the short within a day or two—if not your broker will do it for you. Notice the implied volatility of zero on the bid side of the SPY ITM options a few days before the security goes ex-dividend: If you find yourself the day before ex-dividend with ITM short calls there are a couple things you can do: Sit tight and take the risk that the options be assigned—not all ITM calls will be exercised.
The deeper they are in the money, the higher the likelihood they will be assigned. Roll your short options up to a higher strike price.
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