Abstract

http://ssrn.com/abstract=972613
 
 

References (28)



 
 

Citations (7)



 


 



Failure to Exercise Call Options: An Anomaly and a Trading Game


Veronika Krepely Pool


Indiana University - Kelley School of Business - Department of Finance

Hans R. Stoll


Vanderbilt University - Finance

Robert E. Whaley


Vanderbilt University - Finance

August 30, 2007


Abstract:     
In the U.S., exchange-traded options are unprotected from cash dividend payments on the underlying stock. Consequently, it may become optimal to exercise deep in-the-money call options just prior to the ex-dividend day. In this study, we examine the extent to which option holders fail to exercise their call options on the day prior to an ex-dividend day when it is optimal to do so. Using a sample of call options on stocks with quarterly dividends of at least a penny per share during the period January 1996 through April 2006, we find that more than half of outstanding long positions go unexercised. We estimate that this failure to exercise has caused call option holders to lose over $491 million over a ten-year period. We also show how market makers capture the lion's share of the proceeds by using a dividend spread trading strategy.

Number of Pages in PDF File: 52

Keywords: Ex-dividend, call option exercise, dividend spread

JEL Classification: G13, G14

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Date posted: March 20, 2007  

Suggested Citation

Pool, Veronika Krepely and Stoll, Hans R. and Whaley, Robert E., Failure to Exercise Call Options: An Anomaly and a Trading Game (August 30, 2007). Available at SSRN: http://ssrn.com/abstract=972613 or http://dx.doi.org/10.2139/ssrn.972613

Contact Information

Veronika Krepely Pool
Indiana University - Kelley School of Business - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States

Hans R. Stoll (Contact Author)
Vanderbilt University - Finance ( email )
401 21st Avenue South
Nashville, TN 37203
United States
615-322-3671 (Phone)
615-343-7177 (Fax)

Robert E. Whaley
Vanderbilt University - Finance ( email )
401 21st Avenue South
Nashville, TN 37203
United States
615-343-7747 (Phone)
615-376-8879 (Fax)

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