Options pricing when underlying goes ex-dividend?

Discussion in 'Options' started by turkeyneck, May 15, 2012.

  1. Will the calls and puts decrease and increase in price respectively when the underlying goes ex-dividend?
     
  2. rmorse

    rmorse ET Sponsor

    Calls should increase and puts should decrease x-div.
     
  3. The dividend is already priced into the puts, but in-the-money calls will drop by the amount of the dividend, so long-call holders normally exercise their calls on the last day before the stock goes ex-div.
     
  4. Why do calls increase and puts decrease but not the other way round?

    Does the pricing change across the board or only with ITM options?
     
  5. rmorse

    rmorse ET Sponsor

    If I'm long stock, short calls, long puts, and there is a div, I receive the dividend. After it goes x- div, I'm no longer getting the dividend, so I'm no longer willing the sell that call at that price and buy that put at that price. Now I'm willing to pay less for the put and want more premium on the call for put/call parity.

    The options are priced against a stock price. If there is a .25 div, the model is pricing the stock at current price - .25. After the dividend, the pricing model with remove the adjustment. oTM options are less effected than ItM options because of this.

    Bob
     
  6. rmorse

    rmorse ET Sponsor

    Let's just look at the ITM put. For a stock with a .50 div, I'm willing to pay up to .48 over parity on all Deep ITM puts. With stock. I'll lock in .02, let's assume no commissions. _After x-div, those puts might be parity and an exercise. _So puts go down in price._The reality is that the options stay the same, but the stock adjusts. However, if the next morning the stock is trading at the same price as the day before, you'll see the option adjustments.