well done…..you might also mention that if the small-time trader holding 1 contract decides to take your advice and exercise it optimally in consideration of the dividend, then the service charge for broker-assisted trades will negate the savings he’s trying to get….the advice to exercise gets more and more prudent as the number of contracts owned increases because of the tiered commission scale……I can remember back when, with my broker, assisted trades were $60…now they’re $25…that’d be plus the regular base commission….so actually $34 for one contract, and an extra $0.75 per each contract thereafter…..right?
Thanks, yes, a trader must take into account the commission structure when evaluating both if they want to remove a position and how to most cost effectively step out of a position. The commissions are going to vary from broker to broker and in fact, account to account. Some provide flat fees for exercise, (i.e. x dollars per strike), other tie in the number of contracts etc, etc. The other item to consider when exiting deep in the money positions is slippage and/or how wide the bid and ask spread are. To be fair, you should consider those into the commission equation. For example if there’s a $0.30 spread between the bid and the ask, and you’re not able to get a fill at the mark (1/2 between) then effectively that $.15 above the mark you’re paying should come into play, as you won’t have to pay that when you exercise.
The quick summary would be simply that if you are long deep in the money calls going into ex-dividend, you’re leaving money on the table and you’re exposed to an unnecessary drop, so however you decide to unwind (or if you decide not to, and hold) you’ll at least be aware of the pricing consequences.
well done…..you might also mention that if the small-time trader holding 1 contract decides to take your advice and exercise it optimally in consideration of the dividend, then the service charge for broker-assisted trades will negate the savings he’s trying to get….the advice to exercise gets more and more prudent as the number of contracts owned increases because of the tiered commission scale……I can remember back when, with my broker, assisted trades were $60…now they’re $25…that’d be plus the regular base commission….so actually $34 for one contract, and an extra $0.75 per each contract thereafter…..right?
Thanks, yes, a trader must take into account the commission structure when evaluating both if they want to remove a position and how to most cost effectively step out of a position. The commissions are going to vary from broker to broker and in fact, account to account. Some provide flat fees for exercise, (i.e. x dollars per strike), other tie in the number of contracts etc, etc. The other item to consider when exiting deep in the money positions is slippage and/or how wide the bid and ask spread are. To be fair, you should consider those into the commission equation. For example if there’s a $0.30 spread between the bid and the ask, and you’re not able to get a fill at the mark (1/2 between) then effectively that $.15 above the mark you’re paying should come into play, as you won’t have to pay that when you exercise.
The quick summary would be simply that if you are long deep in the money calls going into ex-dividend, you’re leaving money on the table and you’re exposed to an unnecessary drop, so however you decide to unwind (or if you decide not to, and hold) you’ll at least be aware of the pricing consequences.
Thanks for the note!
Josh