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training_data/curated/text/c43cbf5c64c1c5ff0456ca77841816f7432332510e57ca15e5f5141df50aeefc.txt

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+0.,,,,, I: Definitions 21 
+A word of caution: Do not conclude from this discussion that a call will be exer­
+cised for the dividend if the dividend is larger than the remaining time premium. It 
+won't. An example will show why. 
+Emmple: XYZ stock, at 50, is going to pay a $1 dividend with the ex-date set for the 
+next day. An XYZ January 40 call is selling at 10¼; it has a quarter-point of time pre­
+mium. (TVP = 10¼ + 40 - 50 = ¼). The same type of arbitrage will not work 
+Suppose that the arbitrageur buys the call at 10¼ and exercises it: He now owns the 
+stock for the ex-date, and he plans to sell the stock immediately at the opening on the 
+ex-date, the next day. On the ex-date, XYZ opens at 49, because it goes ex-dividend 
+by $1. The arbitrageur's transactions thus consist of: 
+1. Buy the XYZ January 40 call at 10¼. 
+2. Exercise the call the same day to buy XYZ at 40. 
+3. On the ex-date, sell XYZ at 49 and collect the $1 dividend. 
+He makes 9 points on the stock (steps 2 and 3), and he receives a 1-point dividend, 
+for a total cash inflow of 10 points. However, he loses 10¼ points paying for the call. 
+The overall transaction is a loser and the arbitrageur would thus not attempt it. 
+A dividend payment that exceeds the time premium in the call, therefore, does 
+not imply that the writer will be assigned. 
+More of a possibility, but a much less certain one, is that the arbitrageur may 
+attempt a "risk arbitrage" in such a situation. Risk arbitrage is arbitrage in which the 
+arbitrageur runs the risk of a loss in order to try for a profit. The arbitrageur may sus­
+pect that the stock will not be discounted the full ex-dividend amount or that the 
+call's time premium will increase after the ex-date. In either case (or both), he might 
+make a profit: If the stock opens down only 60 cents or if the option premium 
+expands by 40 cents, the arbitrageur could profit on the opening. In general, howev­
+er, arbitrageurs do not like to take risks and therefore avoid this type of situation. So 
+the probability of assignment as the result of a dividend payment on the underlying 
+stock is small, unless the call trades at parity or at a discount. 
+Of course, the anticipation of an early exercise assumes rational behavior on the 
+part of the call holder. If time premium is left in the call, the holder is always better 
+off financially to sell that call in the secondary market rather than to exercise it. 
+However, the terms of the call contract give a call holder the right to go ahead and 
+exercise it anyway - even if exercise is not the profitable thing to do. In such a case, 
+a writer would receive an assignment notice quite unexpectedly. Financially unsound 
+early exercises do happen, though not often, and an option writer must realize that,