Ex-Dividend Arbitrage in Option Markets

Posted: 25 Jan 2010

See all articles by Jia Hao

Jia Hao

Babson College

Avner Kalay

Tel Aviv University - Faculty of Management; University of Utah - David Eccles School of Business

Stewart Mayhew

Cornerstone Research

Multiple version iconThere are 2 versions of this paper

Date Written: May 2009

Abstract

We examine the behavior of call options surrounding the underlying stock's ex-dividend date. The evidence is inconsistent with the predictions of a rational exercise policy; a significant fraction of the open interest remains unexercised, resulting in a windfall gain to option writers. This triggers a sophisticated trading scheme that enables short-term traders to receive a significant fraction of the gains. The trading scheme inflates reported volume and distorts its traditional relations to liquidity. The dramatic increases in the volume of trade on the last cum-dividend day are facilitated by limitations on transaction costs passed by the various option exchanges.

Keywords: G13, G14, G18

Suggested Citation

Hao, Jia and Kalay, Avner and Mayhew, Stewart, Ex-Dividend Arbitrage in Option Markets (May 2009). The Review of Financial Studies, Vol. 23, Issue 1, pp. 271-303, 2009. Available at SSRN: https://ssrn.com/abstract=1541000 or http://dx.doi.org/hhp038

Jia Hao

Babson College ( email )

Babson Park, MA 02457-0310
United States

Avner Kalay

Tel Aviv University - Faculty of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel
972 3 6406298 (Phone)
972 3 6406330 (Fax)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States
801-581-5457 (Phone)

Stewart Mayhew

Cornerstone Research ( email )

1919 Pennsylvania Avenue NW
Suite 600
Washington, DC 20006-3420
United States

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