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Old 28th November 2012, 10:34 PM
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Default Dividends and Options



I'm looking to understand what is written below:

if you’ve sold calls and there’s a dividend approaching, it increases the probability you may be assigned early.

1) What is the meaning of assigned early ? Read somewhere that assignment happens when option buyer has enforced the option on the option writer (Let me know if there can be any other case of assignment).

2) What is "early" assignment? I don't think that can happen before expiration date. Is it written that way because it was not about Indian markets? Even in that case, why would it happen in some other market? It gives more liberty to buyer.

This is especially true if the dividend is expected to be large. That’s because option owners have no rights to a dividend. In order to collect it, the option trader has to exercise the option and buy the underlying stock.

3) Is the author trying to say that if a company declares large dividend, price rises and Call Option becomes expensive ?

4) What happens for an option on expiration date ? I mean if I write a call option and if the buyer exercises or assigns it, will I have to deliver difference in MONEY (stock price - strike price ) or the stock ? The latter means I shell out brokerage too. Also, what will the buyer receive above difference in MONEY or stock?

Last edited by ijay : 28th November 2012 at 10:44 PM.
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Old 29th November 2012, 10:45 AM
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1) and 2)

"Assignment" happens when an option buyer exercises his option before expiry.

Options sellers are randomly selected and their positions closed.

The exercised options are thus "assigned" to those sellers.

There is no other way that an assignment happens.

In India all stock market options are European style and so there is nothing like an early assignment for Indian options.

American options have the early exercise option and that gives more flexibility to the option buyers.

American options are more advantageous for option buyers and thus are priced higher than European options.

3)

Yes, if something unexpected and good happens, stock prices go up and thus prices of call options go up too.

4)

In India, all options are settled in cash.

Shares are not delivered.

Call buyer only gets the difference (stock price - strike price).

Put buyer only gets the difference (stike price - stock price).
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Old 29th November 2012, 11:02 AM
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Quote:
Originally Posted by ijay View Post
This is especially true if the dividend is expected to be large. Thatís because option owners have no rights to a dividend. In order to collect it, the option trader has to exercise the option and buy the underlying stock.

3) Is the author trying to say that if a company declares large dividend, price rises and Call Option becomes expensive ?
What the author is saying that if the dividend is high, then it is likely that call option buyers will exercise their call options.

It is better to get the stock that is cum-dividend than to get the stock that is ex-dividend.
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