On the 8th of October I bought Clorox (CLX) at 58.67 per share and sold the November 55 calls for 4.17. The total outlay was 54.5. The time value of the call is 4.17 – (58.67 – 55) = 0.5. Today, 26 October, is the ex-dividend day. CLX pays half a dollar per quarter in dividends.
Now, I thought that Friday my shares would be called away by the owner of the calls. But they were not. So I collect the dividend as well as the time value of the call, a total of a dollar.
So long as CLX stays above 55 until expiration, the stock will be called away at that time, unwinding the trade. I would have preferred to have had the stock called away sooner and make a smaller dollar amount. It would have been a larger percent return, 19% annualized versus 15% annualized.
Why would you have expected to be assigned an exercise notice?
Using what criteria?
I cannot see yesterday’s closing markets for the options, but the Nov 55 call had about 50 cents of time premium in it. The owner could have exercised, sacrificed that 50 cent time premium and collected a dividend of 50 cents. Who is his/her right mind would do that.
The exerciser would get all the downside risk, have to pay carry costs through expiration – and what is there to gain? ZERO.
You’re right that it doesn’t make sense to lose 50 cents of time premium to get 50 cents of dividend and the drop in stock price that comes with ex dividend days.
This is what the situation was Friday near the close. CLX closed at 59.14 and the Nov 55 C was 3.7 bid 4.4 ask. So an owner of the call, if he sold at the bid, would get 3.7, less than what the intrinsic value should be, 4.14. If he could sell at the mid-point, he would get 4.05, still less than intrinsic value.
On the other hand, if he exercised, he pays 55 for a 59.14 stock and takes the risk that something happens over the weekend. Monday was the ex- dividend day, so he sells his stock on Monday near the open. The stock drops due to the dividend, but less than the dividend amount.