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training_data/curated/text/639b4deb919d5b183163ef17024a2934dfb15cd474ce5a7a43590d3b83e66577.txt

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+Dividends and Early Exercise
+As the ex-date approaches, in-the-money (ITM) calls on equity options can
+often be found trading at parity, regardless of the dividend amount and
+regardless of how far off expiration is. This seems counterintuitive. What
+about interest? What about dividends? Normally, these come into play in
+option valuation.
+But option models designed for American options take the possibility of
+early exercise into account. It is possible to exercise American-style calls
+and exchange them for the underlying stock. This would give traders, now
+stockholders, the right to the dividend—a right for which they would not be
+eligible as call holders. Because of the impending dividend, the call
+becomes an exercise just before the ex-date. For this reason, the call can
+trade for parity before the ex-date.
+Let’s look at an example of a reversal on a $70 stock that pays a $0.40
+dividend. The options in this reversal have 24 days until expiration, which
+makes the interest on the 60 strike roughly $0.20, given a 5 percent interest
+rate. The day before the ex-date, a trader has the following position at the
+stated prices:
+Short 100 shares at $70
+Long one 60 call at 10.00
+Short one 60 put at 0.05
+To understand how American calls work just before the ex-date, it is
+helpful first to consider what happens if the trader holds the position until
+the ex-date. Making the assumption that the stock is unchanged on the ex-
+dividend date, it will open at $69.60, lower by the amount of the dividend—
+in this case, $0.40. The put, being so far out-of-the-money (OTM) as to
+have a negligible delta, will remain unchanged. But what about the call?
+With no dividend left in the stock, the put call-parity states
+In this case,