Please be aware of the risk associated with call spreads and dividend payment. Only owners of the underlying stock are entitled to receive the dividend. Long call holders do not have the right to receive the dividend unless the call option is exercised and shares are in the account prior to the Ex-Dividend date. Customers that are short stock coming into Ex-Dividend date due to an assignment must pay the dividend. Below is an example where you can lose more money than what was originally calculated.
You have a 100 XYZ bear call spread 128 – 129. The maximum risk (outside of exercise or assignment) is the difference between the strikes which in this example is 1. But if you were assigned and short stock coming into the Ex-Dividend date you have to pay the dividend. If you are short 10000 shares and the dividend rate is $0.56 per share the risk is now $1 plus $0.56. In unfavorable market condition moving against your strategy can lead to an unsecured debit.
Assignments can occur on any day prior to expiration and accounts are selected randomly. You, as the seller of the call option, are obligated to sell stock at the strike price. Calls that have time premium (not to be confused with premium or market price) that is greater than the dividend rate generally will not be assigned. However, there is no guarantee that the assignment will not occur regardless of the time premium or whether the option is in or out of the money. It is the right of the long call holder to exercise and the obligation of the short call holder to accept. There is no guarantee that you will be assigned either. This is the unknown until the assignment actually occurs.
Due to this risk of leaving an unsecured debit we may ask customers to close out of their spread prior to the Ex-Dividend date if you have a short call that is in the money, time premium is less than the dividend and you do not have the funds to pay the dividend in case of an assignment.[back to top]