<p>@dstark – I also have had the experience of a far-out short call being exercised prematurely for a dividend… that was a learning experience for me a while back with covered calls, because I didn’t think I had to worry about the ex-div when the call expiration was several months out, and then the stock was assigned. </p>
<p>Bottom line, it’s risky business. I do try to pay attention to open interest, but one of the lessons I’ve learned is that stuff happens. Even when I think it won’t happen. </p>
<p>If I had noticed the open interest dropped so much the last time there was a dividend, I would not have bothered with these dividend trades. I don’t know how I missed that. I was looking for the change in open interest. :)</p>
<p>Well last week I turned a bad bed gone worst to be not so bad. I ended up lost a little bit. Peanut. It has something to do with EBAY, I was a sure bet that I would make few pennies shorting the stock due to Alibaba, but the minute I put the trade on, it gone the opposite of what I bet, some false rumor on Twitter, must have been released by EBAY management. So I piled in shorted some more when it got higher, average my lost. Luckily Monday it turned the way I was shorting and I sold out quickly for a quick lost.
I told my husband I made money by not loosing money.</p>
<p>I have not followed the craze today other than seeing the pre-opening interviews on CNBC. One thing I can say about BABA: Jack Ma is a class act. </p>
<p>I still remember when someone hacked the AP twitter account and tweeted that terrorists had attacked the White House. The algo computer picked that up and immediately sold off the market. I noticed the market going down and sold my large profit position and ended up with a little profit. Once the scam was identified the market came back to where it was before the tweet. I hate twitter except I like the stock.</p>
<p>To turn the dividend story into a future positive story, as nothing can be done about the past, if the options you are short are assignable because of a dividend, that means all the spreads created with lower strike prices are maxed out.</p>
<p>So, for example, if the spy jan 173 calls are assignable, the jan 168- 173 call spread is worth $5. So…you can get out of the spread 4 months early by taking advantage of the exdividend date and selling the spread the day before the ex dividend date. You can try and sell it for $5 the day before the ex div date. You may have to sell it for $4.98. So what? </p>
<p>You give up 2 cents to get out 4 months early. Your money is now freed up to trade something else. You are not likely to beat the market if the market rises and you can only make 2 more cents. ;)</p>
<p>If you see the calls you are short trading at parity…it is game on…</p>
<p>I usually worry about this stuff at work and since I’m still on jury duty, I haven’t had much time to think about it. My weekends have been tied up with fixing a house that I just sold on Wednesday so now I have the weekends. Tomorrow I’ll be giving this a lot more thought.</p>
<p>And a stock doesnt have to have a dividend …</p>
<p>You are long a $5 spread and it is trading for $4.98 with 3 months to go…</p>
<p>You can free up some money by selling for $4.98. Just put an all or none spread order in so you dont get screwed on commissions. Usually, you have to buy on the bid and then you can sell the other strikes bid.</p>
<p>The bid/ask/last price/ value for the 50 and 55 calls are (27.7, 28.25, 27.8, 28.013) and (22.85, 23.35, 22.75, 23.1655) respectively so there are a number of ways of determining what I will or should get closing out the trade. I probably close out positions differently than most because when I’m closing out a position, I’m almost continuously changing my selling price as fast as I can put it in and punch it out. I start off with roughly the midpoint of the spread. It is my experience however with schwab, etrade and fidelity that the best estimate for a call spread is what someone is willing to pay for the long call and what they are willing to sell the short call, thus I expect that it would be around 27.7 - 23.35 = 3.35 particularly with stocks like fb, twtr etc. That is also why I wait as long as I can to get as close to the closing time as possible on the expiration date if both legs of the spread are itm. You could use the ivolatility calculation = 28.013 - 23.165 = 4.848 for which I’ve never gotten the price predicted. The last sale = 27.8 - 22.75 = 5.05 which is totally absurd. Besides, it’s a moot point as there is no reason for me to sell the spread or roll it up. I could take some of the profit by doing this but it also gives me a margin of safety as the stock would have to drop nearly 30% before I lose money on this.</p>