28 lines
1.8 KiB
Plaintext
28 lines
1.8 KiB
Plaintext
The traders must do the math before each ex-dividend date in option
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classes they trade. The traders have to determine if the benefit from
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exercising—or the price at which the synthetic put is essentially being sold
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—is more or less than the price at which they can sell the put. The math
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used here is adopted from put-call parity:
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This shows the case where the traders can effectively synthetically sell the
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put (by exercising) for more than the current put value. Tactically, it’s
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appropriate to use the bid price for the put in this calculation since that is
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the price at which the put can be sold.
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In this case, the traders would be inclined to not exercise. It would be
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theoretically more beneficial to sell the put if the trader is so inclined.
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Here, the traders, from a valuation perspective, are indifferent as to whether
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or not to exercise. The question then is simply: do they want to sell the put
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at this price?
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Professionals and big retail traders who are long (ITM) calls—whether as
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part of a reversal, part of another type of spread, or because they are long
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the calls outright—must do this math the day before each ex-dividend date
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to maximize profits and minimize losses. Not exercising, or forgetting to
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exercise, can be a costly mistake. Traders who are short ITM dividend-
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paying calls, however, can reap the benefits of those sleeping on the job. It
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works both ways.
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Traders who are long stock and short calls at parity before the ex-date
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may stand to benefit if some of the calls do not get assigned. Any shares of
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long stock remaining on the ex-date will result in the traders receiving
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dividends. If the dividends that will be received are greater in value than the
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interest that will subsequently be paid on the long stock, the traders may
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stand reap an arbitrage profit because of long call holders’ forgetting to
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exercise. |