IWM dividend exposure

[jig]

I currently hold the April 94/95 IWM bear call credit spread and received the following notification from my broker:

 

This email is to inform you of the distribution exposure associated with your spread position(s) in iShares Russell 2000 Index Fund (symbol IWM), which is trading ex-distribution Monday, March 25, 2013. If assigned on the short side of the spread(s), you will be short stock as of March 22nd, and therefore responsible to PAY the distribution on the distribution pay date.

 

With IWM currently trading at 94.15 and the April 94 Call trading at 1.47 how likely is it that I will get assigned and have to pay the dividend?  Would it be better to close the spread now to avoid this dividend risk?

Edited March 22, 2013 by jig

[Marco]

as a rule of thumb I'd look at the delta - when it nears 100% it is likely you are going to be exercised (I would worry above 90%)

the (19th) Apr IWM is somewhere in the 50's delta. So you wont be exercised unless IWM shoots up quite a bit.

 

Another way to look at is, is to see how much time value the long side would destroy by exercising the call and how much div. he would gain for that. With IWM at 94.15 and the 94 Call at 1.47 the guy would lose

1.47 - (94.15-94) = 1.32$ in time value and gain only 0.35$ in dividend - no one will do that. Only if time value drops below what you gain as a dividend the option will be exercised. (ignoring financing cost here to keep it simple)

Edited March 22, 2013 by Marco