Review of Financial Studies Vol. 23 No. 1 2010
Ex-dividend Arbitrage in Option Markets
Abstract
We examine the behavior of call options surrounding the underlying stock's ex-dividend date. The evidence is inconsistent with the predictions of a rational exercise policy; a significant fraction of the open interest remains unexercised, resulting in a windfall gain to option writers. This triggers a sophisticated trading scheme that enables short-term traders to receive a significant fraction of the gains. The trading scheme inflates reported volume and distorts its traditional relations to liquidity. The dramatic increases in the volume of trade on the last cum-dividend day are facilitated by limitations on transaction costs passed by the various option exchanges.
- DOI
- 10.1093/rfs/hhp038
- Volume
- 23
- Issue
- 1
- Pages
- 271-303
- Language
- en
- Sources
- openalex crossref