For in-the-money calls where the corresponding put still has some value, the rule used by most of the market is that if the value of the dividend is more than the value of the corresponding put plus interest, then the call should generally be

**exercised ** for the dividend.

Writers of call options who want to avoid assignment (being

**exercised ** against) may need to either buy back or roll that short call position to another strike in another expiry, being mindful again that the option they roll to is not also a candidate for early exercise.

Examples

National Australia Bank

Ex-Div 7th June 2004

Dividend 83 cents

Share Price $30.31 on last cum dividend date

1. June 2600 Call (deep-in-the-money)

• Corresponding put is worthless

• Interest = 6.4 cents (Strike Price $26.00 X Interest Rate 5.25%) / 365 days X 17 days till expiry

• 83 cents > 6.4 cents

Therefore the June 2600 call will generally be

**exercised**
2. June 3000 Call (In-the-money)

• Corresponding put is 68 cents

• Interest = 7.3 cents

• 83 cents > 75.3

Therefore the June 3000 call will generally be

**exercised**
3. June 3050 Call (In-the-money)

• Corresponding put is $1.09

• Interest = 7.5 cents

• 83 cents < $1.165

Therefore the June 3050 call will generally not be

**exercised ** because the dividend isn't large enough.

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