Selling A Vertical Spread
Even When You Don't Want To
One of our SpreadHunter customers is a Semiconductor Guru that was very bullish on Applied Materials a few weeks ago and bought the 340-350 strike Call Vertical when AMAT was trading at 330-. Today's earnings report pushed AMAT up to 357- (above the short leg) which drove the Call Vertical Spread Price up to 5.80. The Semiconductor Guru is still bullish on AMAT, and the spread has another 4.20 upside if it stays flat or goes higher before expiration on March 20.
Should the trader Sell Or Hold this spread? In most cases the answer is yes — it is best to hold and let the spread expand. Not this time.
The correct answer is:
SELL IT NOW
Why? AMAT goes ex-dividend on February 19, with a payout of 46- per spread. If the short leg gets assigned before the ex-div date, the spread holder is now short stock, has zero upside and has to pay the dividend. He or she will be not receive a dividend on the Long Call Leg. Options Do Not Pay Dividends. If the Spread Holder exercises the Long Leg, this throws away all of the upside and leaves the trader exposed to an unexpected plunge in the stock.
Whenever you see a dividend at any time before expiration and you are in the money on short Call Option Legs, play it safe and get out. The real nightmare scenario occurs if your dividend source contains an error. Hedge Funds pay big $$$ to Dividend Data Providers and then pay even more $$$ to Junior Analysts to review the expensive Dividend Data for errors. Unless you have these items in the budget, JUST GET OUT.
Disclaimer: All Content on the Nuclear Option Substack is for Information and Educational Purposes Only. Before trading, consult with your Professional Financial Advisor and read the Booklet Characteristics and Risks of Standardized Options Contracts published by the Options Clearing Corporation.