Hi team, done a bit or research myself, however would like to confirm something.
I'm looking at Starwood Hotels, ticker is HOT. At the time of writing, the share price is $54.30 and the Dec12 Call 50 Strike is $4.15 on the bid.
This call has intrinsic value of $4.30 - this is how much we get if we exercise it right now. However, we can only sell this for $4.15, i.e. for less than it's intrinsic value.
Now. If I hold this option - there is no point selling it as I would be better of by exercising the option. The only decision I have to make now is when to exercise - now or at expiry.
An important point to consider is that before the option expiry HOT is paying a dividend of $1.25 on 12 Dec 2012, which means that the share price will drop by $1.25 on that day.
For a HOT Dec12 50 Call option holder, as the time value of this option is negative, it would be most beneficial to exercise this option right before the ex-date to take advantage of the dividend. And if I'm holding such an option, I don't see any reason why I shouldn't exercise before the ex-date and wait till expiry instead.
The question is. What if instead of holding this option, I am short it as a part of a multi-leg strategy. What are my chances of being assigned? As per the logic above, my assumption is that majority of these calls will be exercised early. Am I correct?
Thanks!
I'm looking at Starwood Hotels, ticker is HOT. At the time of writing, the share price is $54.30 and the Dec12 Call 50 Strike is $4.15 on the bid.
This call has intrinsic value of $4.30 - this is how much we get if we exercise it right now. However, we can only sell this for $4.15, i.e. for less than it's intrinsic value.
Now. If I hold this option - there is no point selling it as I would be better of by exercising the option. The only decision I have to make now is when to exercise - now or at expiry.
An important point to consider is that before the option expiry HOT is paying a dividend of $1.25 on 12 Dec 2012, which means that the share price will drop by $1.25 on that day.
For a HOT Dec12 50 Call option holder, as the time value of this option is negative, it would be most beneficial to exercise this option right before the ex-date to take advantage of the dividend. And if I'm holding such an option, I don't see any reason why I shouldn't exercise before the ex-date and wait till expiry instead.
The question is. What if instead of holding this option, I am short it as a part of a multi-leg strategy. What are my chances of being assigned? As per the logic above, my assumption is that majority of these calls will be exercised early. Am I correct?
Thanks!
