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On 2/21/2022, Bob wrote a 3/17/2022 $29.00 call on SBLK. On 2/26/2022, SBLK was trading at $31.76 and the cost-to-close the short call was $2.78. On 3/1/2022, SBLK was going ex-dividend for an eventual $2.00 per-share distribution. Will Bob’s shares be sold the day prior to the ex-date?
Case for early exercise
- Ex-dividend dates are the main reason for early exercise
- On 2/26/2022, the $2.78 cost-to-close premium consisted of only $0.02 in time-value with the possibility of a $2.00 per-share dividend on the horizon, if exercised
Case against early exercise
- Very rare, even when ex-dividend dates occur prior to contract expiration
- Contract expiration (3/18/2022) is far from the ex-dividend date (3/1/2022)
- Option buyers want to be option sellers, not share owners
- On the ex-date, SBLK will decline in value by $2.00 due to the future distribution. This is 1 of the factors in determining the stock price that day
Price chart of SBLK
SBLK Price Chart Before & After the Ex-Date
- 2/21/2022: Covered call written on an accelerating price chart (red arrow)
- 2/26/2022: SBLK appreciated to $31.76 (blue arrow)
- 3/1/2022: SBLK declines in value on the ex-date (green arrow)
Discussion
Early exercise is possible, but unlikely. If it does occur, the final returns will be maximized, and the cash freed up from the sales of SBLK can be used to initiate another option-selling income stream in the same contract cycle. Unless we absolutely want to retain the underlying shares (Tax issues, for example), a case can be made that early exercise should be embraced rather than avoided.
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