Exercising Long In the Money Options to Collect Dividend
Exercising Long In the Money Options to Collect Dividend
Many publicly traded companies pay dividends to their stockholders. In fact all 30 of the Dow Jones Industrial stocks and almost 400 of the S&P 500 stocks have dividends. If you're trading options in these stocks at some point you will need to address the question...
When do I exercise my long in the money options to take control of the stock and collect the dividend?
Call options are usually exercised or assigned the day before the ex-dividend date, which is normally two business days (3 minus 1) before the record date. But which long call options do I exercise? Simply, you’d exercise an in the money long call option when its extrinsic value is less than the dividend being paid.
Example:
- ABC stock going ex-dividend
- Stock trading at $30 per share
- Quarterly dividend is $.50
The in the money 28 calls you are long are trading for $2.10. They have $2.00 intrinsic value and .10 extrinsic value. If you exercise them you lose the .10 extrinsic value but gain the .50 dividend.
So, you’d exercise those calls before the ex-dividend date and capture .40. If the 28 calls were trading for more than $2.50, say, $2.60, where they have .60 of extrinsic value, you would not exercise because you would lose .60 extrinsic value and take in only .50 from the dividend.
When can I expect to be assigned short stock on my short options if a stock pays a dividend?
- ABC stock going ex-dividend
- Stock trading at $30 per share
- Quarterly dividend is $.50
The in the money 28 calls you are SHORT are trading for $2.10. The 28 put is trading for .10. A simple way to see if you might be assigned on that short call is to look at the price of the put. The call and put at the same strike price have roughly the same extrinsic value. If the put at the same strike as your short call is trading at less than the dividend, you will likely be assigned.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.