Ex-Dividend Arbitrage in Option Markets
51 Pages Posted: 2 Nov 2006
There are 2 versions of this paper
Ex-Dividend Arbitrage in Option Markets
Ex-Dividend Arbitrage in Option Markets
Date Written: October 4, 2006
Abstract
We examine the behavior of call options during the ex-dividend period of their underlying stocks. The evidence is inconsistent with the predictions of rational exercise policy; a significant fraction of the open interest remains unexercised. The potential profits to the option writers trigger a sophisticated trading scheme that enable 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 volume of trade on the last cum-dividend day are facilitated by limitations on transaction costs passed by the various option exchanges.
Keywords: Arbitrage, option market, Ex-dividend
Suggested Citation: Suggested Citation
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