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

52 Pages Posted: 20 Mar 2007

See all articles by Veronika Krepely Pool

Veronika Krepely Pool

Vanderbilt University - Owen Graduate School of Management

Hans R. Stoll

Vanderbilt University - Finance

Robert E. Whaley

Vanderbilt University - Finance

Date Written: 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.

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

JEL Classification: G13, G14

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: https://ssrn.com/abstract=972613 or http://dx.doi.org/10.2139/ssrn.972613

Veronika Krepely Pool

Vanderbilt University - Owen Graduate School of Management ( email )

401 21st Avenue South
Nashville, TN 37203
United States
615-343-0277 (Phone)

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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