5

I was talking with an options trader that said he never writes calls on stocks that have dividends, because of various reasons. One of the reasons being that, under certain conditions, the writer of the option is obligated to surrender dividends they received when the option buyer should have received them.

He mentioned that this could happen if the buyer exercised the option at or around the ex-dividend date. Is this true?

  • According to my limited knowledge this is never supposed to happen with a reasonable broker – mafu May 2 '11 at 20:51
  • 1
    Nothing to do with broker. When a stock is called due to a short call position, it's simply assigned randomly. With the volume of transactions, I doubt a human touches this. – JoeTaxpayer May 6 '11 at 15:13
3

The dividend goes to he who owns the stock when it goes ex-div. A buyer (the call buyer who exercises) will not exercise unless the stock plus dividend are in the money. Otherwise they'd be buying the stock at a premium.

I like the scenario your friend doesn't. If I can find a high dividend stock and sell the call for a decent price, I may get a great return on a stock that's gone down 5% over a year's time. If it goes up and called away, that's fine too, it means a profit.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.