r/options
Combo box on american options + early exercise with dividends
Author questions why a box spread's price remains unchanged post-dividend announcement, suspecting a risk-free arbitrage.
I have a really big doubt, because looking at how the market is pricing this combo really doesn't make sense to me.
I'm basing my question off a real option stock: p911 Mar'27
There's this combo:
40 Call Long
50 Call Short
40 Put Short
50 Put Long
this is a box which net you credit, to keep things simple let's say that you can buy it for 10, getting a debit of 10, while if you do the opposite you sell it for 10 total. Lets say that there's a dividend coming and the current price of the stock is 45, if you buy the combo shown you can immediately trigger the 40 call leg and get the dividend, let's say the dividend is equal to 1.
let's say that at expiry the price is still between 40 to 50, then you exercise the put at 50 and get back the 10 debit you had at start (from the 40 call and the 50 put, regardless of where the price is now), this works even for prices above 50 anyway.
But other than that 10 credit you also got the dividend of 1. shouldn't that be difficult to buy the combo at 10? currently bid - ask is at 8.85 - 10.92, I know that for a price of 10 / 10.05 you get a trade from some market maker which seems odd to me? Why does that happen?
I know that there the risk that price before end will drop below 40 making you loose some money but that risk seems to little compared to the free gains?
There's also one extra thing, bid ask is at 8.85 - 10.92, but this bid ask is the same bid ask that was present before the dividend was announced, I would have expected that with the dividend the price of the combo would increase? If there's no dividend buying it has even lower benefits, while the dividend of 1 seems to make it better and I would expect the price to increase even a little bit. I mean the price of the option is exactly the same as before the dividend announcement and I really don't understand why is that?
anyway at expiry with this combo you are guaranteed a return equal to the dividend if you buy it at 10 right? Or is there something I don't get?
I'm basing my question off a real option stock: p911 Mar'27
I don't see a ticker symbol in any of that, so as far as I'm concerned, it's not a real option trade.
TL;DR - boxes on anything other than cash-settled contracts is beyond stupid. You're just setting yourself up to lose a lot of money. Don't do it.
P911 is the ticker symbol, Mar'27 is the expiry of the option I'm talking about.
Oh, sorry. I thought you meant a put with a 911 strike price.
What stock exchange?
Eurex
Exercising an American box early to grab a dividend completely breaks the trade's symmetry and exposes you to major carry costs, a structural trap that QuantWheel visualizes perfectly before you lock up your capital. Check my profile if you need the tool link or want to jump into a massive trading server where we share chart setups, options flow, and politician trade tracking.