Strange Deltas
Because American calls become an exercise possibility when the ex-date is
imminent, the deltas can sometimes look odd. When the calls are trading at
parity, they have a 1.00 delta. They are a substitute for the stock. They, in
fact, will be stock if and when they are exercised just before the ex-date.
But if the puts still have some residual time value, they may also have a
small delta, of 0.05 or perhaps more.
In this unique scenario, the delta of the synthetic can be greater than
+1.00 or less than −1.00. It is not uncommon to see the absolute values of
the call and put deltas add up to 1.07 or 1.08. When the dividend comes out
of the options model on the ex-date, synthetics go back to normal. The delta
of the synthetic again approaches 1.00. Because of the out-of-whack deltas,
delta-neutral traders need to take extra caution in their analytics when ex-
dates are near. A little common sense should override what the computer
spits out.