The non-optimality of the over-the-counter options dividend protection

Abstract

Although no such adjustments are made in exchange listed options, options in the over-the-counter (OTC) market are adjusted for cash dividends by reducing their striking prices by the amount of the cash dividend on each ex-dividend date. We prove that if a call is either out-, at- or in-the-money (just before the ex-dividend dates), the OTC-dividend-protection procedure generates a sure loss to the call buyer, but it tends to be correct if a call is very-deep-in-the-money.