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Dividend risk

The risk that a short in-the-money call is exercised the day before an ex-dividend date, leaving the seller owing the dividend.

A call holder who exercises the day before the ex-date owns shares on the record date and receives the dividend. The assigned seller is short the shares on that date and owes it. This is the single most common cause of unpleasant surprises for covered-call and spread sellers.

The check is mechanical: compare the dividend with the short call's remaining extrinsic-value. If the dividend is larger, assume assignment and roll or close first.

Example: XYZ at $52, ex-dividend $0.75 tomorrow, and the $45 call trades with $0.10 of extrinsic value. Exercising captures $0.75 and costs $0.10. You should expect assignment on essentially the entire open-interest, and you will owe $75 per contract on top of the share delivery.

Related: early-assignment, early-exercise, dividend, covered-call

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Payoff of a long call at expiryA flat loss equal to the premium below the strike, turning upward at 45 degrees above it.Profit / loss per share08595115125Strike 105Max loss 3 — the premium paidBreakeven 108Profit keeps growingUnderlying price at expiry
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.

Educational only, not advice. Spotted an error? Post in Site Feedback.