Yes, this happened to me last December while I was asleep at the switch. If the amount of time value left in your short option is less than the divvy, you stand a very high probability of being assigned and having to pay the dividend out of your pocket. The double whammy is that except under certain circumstances (trader status for example), you will probably not be able to deduct the divvy paid on your tax return.
Ken
PS. Be especially careful if you are short the option in an IRA account. I have had friends that this happened to in an IRA and they wound up fighting with their brokerage firm because short stock is NOT allowed in an IRA and the brokerage firm somehow wanted to declare the whole account no longer an IRA.
From: ConservativeOptionS
Sent: Wednesday, July 21, 2010 12:55 PM
To: ConservativeOptionS
Subject: [ConservativeOption
No, I did not, and thank you!
--- In ConservativeOptionS
>
> Hi everyone
> I just read this from a friend and thought the group would find this interesting. Does anyone know anything about this?
>
> Terry's Tips:
>
> "Beware of ETF Expiration Dividends:
>
> Since ETFs are made up of a basket of stocks, owning an ETF entitles you to receive any dividends paid by members companies in the ETF. For some strange reason, many ETFs have decided the best time to pay those dividends is on the exact same Friday that monthly options expire.
>
> For example, the S&P 500 tracking stock (SPY, often called Spyders) declares a dividend (usually in the $.50 -$.60 range) on the third Friday of December, March, June, and September). The financial ETF called XLF follows the same policy.
>
> If you are short an in-the-money call on one of these expiration Fridays, there is an excellent chance that the holder of the option will exercise the call (the deeper the call is in the money, the greater the chance of exercise). If an exercise takes place, people who are short these calls are selected randomly for assignment. On the morning of the third Friday of the month, you may find that you are short shares of the company stock in your account. You will have to buy those shares back with the cash that was put in your account by the person who exercised the call.
>
> However, in addition to the cost of buying the shares, you are responsible for paying the dividend that was due to owners of the ETF on that day. Your account will be charged the dividend amount about 30 days later.
>
> To avoid this dividend charge, it is important to close out (i.e., buy back) in-the-money call options on popular ETFs such as SPY, DIA, and QQQQ no later than the Thursday preceding one of those expiration Fridays.
>
> This action is called for more frequently in the Dow Jones Industrial tracking stock (DIA, better known as Diamonds) which declares a dividend (usually in the $.15 -$.30 range) on the Friday expiration every month.
>
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