Continuous Dividends

You may also sell call options against stock that you do not own, although this is considered to be among the riskiest of all investment strategies because your risk is unlimited. You can buy a put option, which gives you the right but not the obligation to sell stock at a set price for a specified period of time.

You typically buy a put option if you anticipate an impending decrease in the price of the underlying stock.

If you own the underlying stock, you are entitled to any dividends paid on the stock. If you exercise your right to sell the stock, you must deliver the stock. Since you no longer own the stock, you are no longer entitled to any dividends paid on the stock.

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You may buy a put option on stock you do not own. You are not entitled to any dividends paid by the underlying stock because you do not actually own the stock. You can sell a put option. In this situation, you would own neither the option nor the underlying stock. You are not entitled to any dividends paid on the underlying stock. If the option is exercised, you will be compelled to purchase the required number of shares.

Dividends and Options Assignment Risk - Fidelity

Exercising an equity call option prior to expiration ordinarily provides no economic benefit as:. Nonetheless, for account holders who have the capacity to meet an increased capital or borrowing requirement and potentially greater downside market risk, it can be economically beneficial to request early exercise of an American Style call option in order to capture an upcoming dividend.

As background, the owner of a call option is not entitled to receive a dividend on the underlying stock as this dividend only accrues to the holders of stock as of its dividend Record Date. All other things being equal, the price of the stock should decline by an amount equal to the dividend on the Ex-Dividend date. While option pricing theory suggests that the call price will reflect the discounted value of expected dividends paid throughout its duration, it may decline as well on the Ex-Dividend date.

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The conditions which make this scenario most likely and the early exercise decision favorable are as follows:. Also assume that the option price and stock price behave similarly and decline by the dividend amount on the Ex-Date.

Here, we will review the exercise decision with the intent of maintaining the share delta position and maximizing total equity using two option price assumptions, one in which the option is selling at parity and another above parity. Here the cash proceeds are applied in their entirety to buy the stock at the strike, the option premium is forfeited and the stock net of dividend and dividend receivable are credited to the account. In this scenario, the preferable action would be No Action.

Special dividend

NOTE: Account holders holding a long call position as part of a spread should pay particular attention to the risks of not exercising the long leg given the likelihood of being assigned on the short leg. Note that the assignment of a short call results in a short stock position and holders of short stock positions as of a dividend Record Date are obligated to pay the dividend to the lender of the shares. In addition, the clearinghouse processing cycle for exercise notices does not accommodate submission of exercise notices in response to assignment.