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Strategies & Market Trends : Calls and Puts for Income
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To: Debt Free who wrote (4677)11/1/2010 10:02:45 AM
From: kaka1 Recommendation   of 5891
 
Debt Free,

re: 'Does anyone have any idea on how often that occurs and whether or not there is a high probability of that occurring ?'

As a general rule, you should look at the cost to purchase a put at the strike of your short call in question to get an idea of dividend assignment risk. If the cost to purchase the put is less than the dividend, there is a good chance your short calls will be assigned.

For example, take a look at the PFE options. The Nov 15 puts have an ask of .03. There is a very high probability that someone short the 15 calls will get an assignment since this figure is well below the .18 dividend.

You have to consider this from the mindset of someone who is long the call. What would make them exercise their position to capture the dividend while providing them the same risk profile as the long call? If they exercise their long call they are long stock. They need now to be long a put since a synthetic long call is equivalent to long stock plus long put. If they can set up the same risk profile as their original long call for less money than the dividend, there is a high probability it will be done.

The 17 strike calls you mention have a 17 long put cost currently of .19, so you're right on the cusp. Any further movement up of PFE and subsequent less expensive put price will increase the likelihood of early assignment on your covered call and assignment cost.

As an aside, if the short call is naked and assignment leads to short stock, your account will be responsible for the dividend payout which you'll see via a debit to account.

cheers,
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