Options: Exploiting AmEx's Ex-Dividend

Say that the calls are worth parity right now -- that is $2.45 with the stock at $23.98. If the calls the option market-maker is short are not exercised, then the stock will fall by the dividend amount. So the stock, in this case, falls by 18 cents, the amount of the dividend, dropping to $23.80.

The call that the market-maker is short also falls by the amount of the dividend to $2.27. Since the market-maker is long the stock (a loser in the fall) and short the call (a winner in the decline) it seems that the market maker has no economic gain, but the market-maker gets to pocket the dividend of 18 cents.

That is all there is to this trade: market-makers trying to get short the calls so that they can be a part of the open interest in each of those strikes. So the volume that we see is market-makers buying and selling the calls with one another. All of the trades go on the books as opening. The market-makers are smart enough to exercise their calls and only ones left are anyone who does not exercise.

Investors should be aware of activity like this so that they do not get fooled into thinking the options activity will give them some clues about the stock activity. When looking at options activity, particularly deep-in-the-money call (DITM) options, investors should be attune to this and other arbitrage activity to make sure they have a clear picture of the types of risks people are taking in their stocks.

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Jud Pyle is the chief investment strategist for Options News Network and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.