Question: Can we predict whether our short Call Options will (or will not) be exercised on the day prior to the ex-dividend date?
This morning, the Covered Calls Advisor was expecting to learn that my 3 short Cabot Oil & Gas August 20th $15.50 Calls had been exercised early on the day prior to today's ex-dividend date. However, exercise of these Call options did NOT occur despite there being only $.02 time value remaining. If the owner of the Calls had exercised, they would have collected today's ex-dividend at $.11 per share with only 11 days remaining until the options expiration date and the stock price currently 5.7% in-the-money.
Today's surprising outcome was the opposite of five instances earlier this year (see chart below) when the opposite decision occurred, namely when the Covered Calls Advisor was surprised that early assignment DID occur given the relatively small ex-dividend amount minus time value remaining per day until expiration that the Call owners achieved by exercising early. These early assignments always occurred on the day prior to the ex-dividend date and the Covered Calls Advisor was pleased to immediately receive the remaining time value as profit since the result of closing the Covered Calls positions early meant that a higher annualized return-on-investment (aroi) occurred (compared with the aroi that would be achieved if the position had instead been assigned later on the options expiration date).
The higher the value in column 9 above, the greater the likelihood that the short Call options will be exercised early (on the day prior to the ex-dividend date). However, in each case above, the Call owners' early exercise decisions were opposite of what the Covered Calls Advisor expected. So, although we can often correctly guess whether our in-the-money Covered Calls positions will be assigned early (on the last business day prior to an ex-dividend date), these examples (experienced this year in the Covered Calls Advisor Portfolio) demonstrate that sometimes a Call owners' decision on the day prior to the ex-dividend date surprises us and is the opposite of what was expected.
As always, I welcome receiving your emails whenever you have any
comments or questions related to this post or anything related to
Covered Calls investing.
Jeff Partlow
Covered Calls Advisor
partlow@cox.net
