Effect of Dividends on Option Pricing
Meanwhile, options are valued taking into account the projected dividends receivable in the coming weeks and months up to the option expiration date. Consequently, options of high cash dividend stocks have lower premium calls and higher premium puts.
Effect on Call Option Pricing
Options are usually priced with the assumption that they are only exercised on expiration date. Since whoever owns the stock as of the ex-dividend date receives the cash dividend, sellers of call options on dividend paying stocks are assumed to receive the dividends and hence the call options can get discounted by as much as the dividend amount.
Effect on Put Option Pricing
Put options gets more expensive due to the fact that stock price always drop by the dividend amount after ex-dividend date.
- Investing in Growth Stocks using LEAPS®
- Day Trading using Options
- Buying Straddles into Earnings
- Writing Puts to Purchase Stocks
- Dividend Capture using Covered Calls
- Leverage using Calls, Not Margin Calls
- Bull Call Spread: An Alternative to the Covered Call
- Understanding the Put-Call Parity
- Difference between a Futures Contract and a Forward Contract
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