Covered calls Early Exercise Issue

From the Justovered calls blog. This is a very nice clear explanation of the exercise issue. This happen to me once on a dividend issue as described below. justcoveredcalls@yahoogroups.com

Hi Folks,

I don't read finance/investing books every day, but I always have an investing-related book that I am in the process of reading at any given time. Right now, my in-process book is "The Volatility Edge in Options Trading" by Jeff Augen.

I've observed that many covered calls investors have what seems to me to be an unnecessary, excessive fear of early exercise of their stock. In Augen's book he makes a simple statement that helps clarify our understanding regarding why early exercise is so unusual. Augen states: "because early exercise of an in-the-money option involves discarding the remaining time premium, it rarely occurs."

From my experience with covered calls, virtually the only time that I have been exercised early is when there is an ex-dividend date before the expiration date and the dividend amount is greater than the time-value premium remaining in the call option. Otherwise, it is in the call owner's economic best interest to simply sell the option they own rather than exercise it early -- that is, he/she will make more profit by simply selling the option rather than exercising it.

Consequently, it is important for us covered calls investors to be aware of the ex-div dates and ex-div amounts for all stocks in our covered calls portfolios. Also remember in this regard: the owner of the stock at the market close on the day prior to the ex-div date is the owner that will receive the dividend payment.

Hope this explanation is helpful in calming any unnecessary fear of early exercise that you might have had.

Jeff