if a stock is at the money to slightly ITM and about to go ex, does the short term call have a negative delta? there seems to be a lot of REIT’s in this scenario…
is it American or European? American Call option in exercise will be 100 Delta up until it goes ex, and then it will revert to 0 delta or whatever it would be at the price minus the div. European option delta will be treated essentially like the Div isn’t there. The Delta is always positive since the Div will take place whether or not the option is ITM and a significant price increase will always increase the value of a call. The interesting thing is that this is the way you can construct a scenario where both the call and put on the same strike/expiration are 100 Delta…
OK I think I see where I was goofed. The theoretical delta, I agree with you. But market delta is different since the option trading above theoretical, i guess you can call it hyper-theta, but here is the scenario. American. today is 9/5 stock goes ex 9/6/07 for $1.2 Stock @ 31.15 Sept Call trades @ 1.4 So if the stock trades over 31.2 then obviously it will be excersied early. But at certain price on day before EX, I think call trades at negative market delta (maybe proper term is hyper theta) at certain price, somewhere between 31.1-31.2 because the time value would basically go to zero over 31.2 and trades 100% delta over 31.2
Well, for the stock to fall out of exercise, you need: Time Value + Carry on $30 > 1.2 in terms of carry, you have (.0525)*((22-5)/365)*30=~.07, so you need Time Value >=~1.13 to remove the 100 Delta. That’s quite a bit of TV for a 17 day option… View this from the short side, say you wanted to bet on a short call not getting assigned so you sell a call into the Div. Would you ever hedge that with short stock?