What effect do dividens have on short calls?

Question

If I have shorted some call options, do I have to pay any dividends that the stock declares?

Answer 1

You do not pay any dividends However, you should be aware if the call is in the money there is some risk that you will be assigned and have to deliver the stock before receiving the dividend. If you sold the option naked that would leave you with a short stock position and you would be required to pay the dividend on a short stock position.

Good Luck,
Z

Answer 2

The person buying the call won't own the stock until the option is exercised. The only thing the dividend will affect is the option's intrinsic value.

Answer 3

No, not on calls. There would be a strike price adjustment for the dividend. If you shorted the stock then you would be responsible for paying the dividend to the shareholder whose shares you borrrowed to sell short.

Answer 4

No, however the price of the call option when you sold it reflected the market's expectations of that dividend.

Note, however, if you sell a call option in the US, it is "American style," meaning that it can be exercised on any trading day. If the stock price is trading above the strike price the trading day before the stock goes ex-dividend, the holder of the call option may find that it is best to early exercise the call option and capture the dividend for him/herself.

This means that you may receive an early exercise notice on the ex-date and find yourself short shares on that date. (It takes a day for you to get the notice.)

A quick and dirty way to see if it would be optimal to exercise is to look at the delta of the option in your model. If the delta is close to one on the day before the ex-date, it ,may be optimal to exercise. (Better model explicitly tell you whether it is optimal to exercise.)