EX-DIVIDEND PLAYS BONANZA FOR TRADERS, STUDY FINDS
Feb 28, 2008
The study, conducted by researchers at Vanderbilt Owen Graduate School of Management in Nashville, Tennessee, examined the extent to which retail option holders failed to exercise their call options on stocks with quarterly dividends from January 1996 through June 2006.
"Because many call option holders have failed to exercise these options they experience a price drop in the call premium – a premium that market makers and professional traders can capture by selling a huge number of calls on the day before ex-dividend," said Robert Whaley, a professor of finance at Owen.
"Many rely on the fact that call option holders fail to exercise allowing them to capture the ex-dividend price drop," Whaley said.
"We were shocked to see the vast amount of money that is being left behind," Whaley said. "The failure to exercise options leaves these profits exposed to professional traders, who are pocketing the overlooked cash."
Whaley believes exchanges and brokers should provide more guidance to mitigate future losses.
In the study, he recommends that brokers could share more information with their clients, such as e-mail alerts to those holding positions before ex-dividend day