EC Exercise Calls before Market opens

I was hoping someone can explain to me how you can get to take part in the EC (Exercise calls) similar to those that took place shortly after 7am according to Commsec Professional Trader for Westpac this morning.

The bank goes ex-dividend today so anyone on their books as of last night is entitled to the dividend. Usually there is a quick slump in the price the next day, sometimes equal to the dividend and franking price (in this case almost $1)

As some of these trades were going for $27.50, this is not much below last night's closing price.

How are they able to do that and how can I get a piece of the action.

In one transaction (according to the site) 507,000 shares trades @$27 for a grand total of $13,689,000.00

I can understand (sort of) what happens in the auction that takes place just before the market opens, but these were 3 hours before?

What really makes me confused is if it is a like a "Put" option, seeing WBC was selling at slightly less than $27.50 just before 4pm yesterday, why weren't the $27.50 ones triggered then?

If you hold a call option with a strike of 27 dollars, you can exercise it at any time. This is done by calling your broker the day before you want to do it. Options are exercised overnight. So the shares getting bought or sold at 7 am are most likely the result of option contracts being exercised/assigned.

In the money options don't get exercised automatically until expiry. Someone would have rang their broker yesterday and told them to exercise their bought options.

As ASX trades in American style options, they can be exercised at any time. This is done, at least through Commsec, by calling them the day before you want to exercise your options.

OK Thanks very much for that answer. It explains the options bit.

However, I am still confused about the timing of it and who is doing it and why. Has it been done actually at 7am in the morning ie after the books have closed and dividends recorded but before the open auction?

Would they have qualified for the dividend?

According to Commsec protrader, 276 trades took place between 7:05.27 and 7:05.57am today and the prices of these ranged from $13.50 up to $27.50.

The opening price for today was quoted as $27.06

Are these trades used in the pre-open calculation?

For those that got $27.50, isn't it a good way to "dividend strip" and get out before the predicted post dividend price drop?

My calculation shows 10,937,000 shares were involved just in this period.

That's an awful lot of money (and shares)

Who bought them?

I suppose I am looking for an explanation or an example of what is being done and how, even a hypothetical with an indication of who might be doing it and what they are getting out of it (ie profit?)

ozambersand said:

OK Thanks very much for that answer. It explains the options bit.

However, I am still confused about the timing of it and who is doing it and why. Has it been done actually at 7am in the morning ie after the books have closed and dividends recorded but before the open auction?

Would they have qualified for the dividend?

According to Commsec protrader, 276 trades took place between 7:05.27 and 7:05.57am today and the prices of these ranged from $13.50 up to $27.50.

The opening price for today was quoted as $27.06

Are these trades used in the pre-open calculation?

For those that got $27.50, isn't it a good way to "dividend strip" and get out before the predicted post dividend price drop?

My calculation shows 10,937,000 shares were involved just in this period.

That's an awful lot of money (and shares)

Who bought them?

I suppose I am looking for an explanation or an example of what is being done and how, even a hypothetical with an indication of who might be doing it and what they are getting out of it (ie profit?)

Click to expand...

Folks will exercise bought options before expiry if there is a financial benefit. If there is still extrinsic value in the option the owner will lose that value when exercising early. It will only be done (if the option holder has any brains) if the benefit (ie the dividend) is greater than the loss of extrinsic value.

For those that got $27.50, isn't it a good way to "dividend strip" and get out before the predicted post dividend price drop?
Owners of call options didn't "get" $27.50, they "paid" $27.50 as a call option is a right to buy. They had to get in to get the dividend.

The price of the options cum dividend also account for the coming dividend, so there is no free lunch here. The likely benefit in % terms is not great (if any), but adds up to a lot of money with big parcels.

For put options, these will be exercised early if the cost of carry exceeds the extrinsic value of the put, assuming the option holder also owns the shares. This is why sans any dividend considerations, ITM puts are far more likely to be exercised early.

Cheers

Who bought them?

Whoever exercised the call contract, they bought the shares.

An interesting update to this is that those 276 trades mentioned above have disappeared from that day's "course of sales"

Could it have been a "glitch" or weren't they meant to be viewed by the general public?