Early assignment around dividends

Lesson 9 established that exercising a call early usually destroys the remaining extrinsic value, so it is generally not done. A dividend is the main exception, and understanding why makes the whole mechanism click.

A dividend belongs to whoever holds the shares on the record date. An option holder does not hold shares, so they do not receive it. If they exercise before the ex-dividend date, they hold the shares and do receive it. So the dividend is a reason to exercise early that has nothing to do with direction.

The comparison is straightforward. Exercising early forfeits the option's remaining extrinsic value and captures the dividend. When the dividend exceeds that remaining extrinsic value, exercising is the better arithmetic, and holders of deep in-the-money calls with little extrinsic value left will do it. The writers of those calls are assigned, typically the day before the ex-dividend date.

For a writer this creates a specific, dated exposure. If assigned before the ex-dividend date on a call written against shares held, the shares are delivered and the dividend goes to the exercising holder. If assigned on a call not covered by shares, a short share position exists across the ex-dividend date, which means owing the dividend. Either way, the timing is knowable in advance: the ex-dividend date is published, and the condition — remaining extrinsic value below the dividend — is computable.

Note the asymmetry with puts. A dividend reduces the share price on the ex-date, which increases a put's value, so a dividend gives a put holder a reason to wait rather than exercise early. The early-exercise pressure on puts comes from a different source: interest on the strike proceeds when a put is very deep in the money.