DGI Adventure – 05/27/16 – Covered Call Exercised Early – ABX July 17 Expiry – $9.00 Strike

Well that was weird.

ABX went ex-dividend yesterday, and apparently some people (or robots) exercised their July 17 $9.00 calls on Wednesday. My shares were selected by the randomizer to be assigned, which means I sold 100 shares of ABX at $9.00/share yesterday. That’s kind of a bummer since ABX was trading between a high of $17.78 and $16.97/share.

Granted when you’re short in the money (ITM) calls you have to be aware of ex-dividend dates. If the time value of the option contract is worth less than the dividend amount, it makes sense for the holder of the call option to exercise early, call the shares before the ex-dividend date and pocket the arbitrage difference between the dividend and the time value of the option. This is what’s known as “assignment risk” of a short call option position.

I am fully aware of assignment risk, and when I rolled my call option forward back in April I checked ABX’s dividend cycle to see how close the ex-dividend date would be to the expiry.

Assignment risk of call options is usually an issue when the ex-dividend date is shortly before the expiration date of the option contract. If there isn’t much time left before expiration, the time value of the option is low. July 17th was 53 days away in case you’re counting along at home. Also ABX’s quarterly dividend is only $0.02/share. So the only way that arbitrage pays off is if the time value is only $0.01/share…or less…I guess…?

I have to admit, I wasn’t paying very close attention to the option’s price this week. It didn’t even occur to me that the time value of an option with 53 days left to expiration would be less than $0.02. And even if it was only $0.01…is a $1.00 arbitrage really worth it? What is your trading commission on this deal?

Weird things can happen when there isn’t a lot of liquidity, and in all fairness, not many people are watching the $9.00 ABX strikes right now… 

Plus ABX had a crazy day before ex-dividend:


ABX 5 min Chart – 05/25/16 – 05/26/16 – Chart Courtesy Yahoo Finance

The low for 05/25/16 was $16.24/share. Assuming this person/robot bought the call option during that morning trough when intrinsic value was only $7.24/share, it’s conceivable that they could have exercised at the end of the day just before shares closed at $17.28 ($1.04 gain or 14.4% on the option contract), and the $0.02/share dividend juice was just that: extra juice on an already dynamite trade.

That’s the only way this makes sense right?

Oh well. The good news is that the rest of my inherited IRA assets finally hit the Interactive Brokers account, which means the next couple weeks are going to be plenty busy. 

And I’m done with gold stocks for a while. AUY goes ex-dividend 06/28/15 for a $0.005/share dividend. I’m short October call options, and I’ll be god damned if those get assigned. I mean come on…


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