Ex-dividend arbitrage in option markets

Jia Hao*, Avner Kalay, Stewart Mayhew

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


We examine the behavior of call options surrounding the underlying stock's ex-dividend date. The evidence is inconsistent with the predictions of a rational exercise policy; a significant fraction of the open interest remains unexercised, resulting in a windfall gain to option writers. This triggers a sophisticated trading scheme that enables short-term traders to receive a significant fraction of the gains. The trading scheme inflates reported volume and distorts its traditional relations to liquidity. The dramatic increases in the volume of trade on the last cum-dividend day are facilitated by limitations on transaction costs passed by the various option exchanges.

Original languageEnglish
Pages (from-to)272-303
Number of pages32
JournalReview of Financial Studies
Issue number1
StatePublished - Jan 2010


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