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Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date.

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.

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