When you do a short put, how do you figure out how much of the put value has the dividend payment factored in? Should you worry about the dividend value only when the strikes are ITM? In other words, is it correct that OTC strikes have no dividend value? Thanks!
Okay, I'll take a stab. Mind you this is just a guess. Multiply the dividend amount by the probability of closing at or below the strike. You can probably use delta as an approximation of that probability. The put value should be higher by that amount. This sounds right to me but it's just my guess. As I recall McMillan's book has some other methods that are probably better than my above guess. Don
?........compare the value of the put option that has the dividend to that of a put option that doesn't pay a dividend using the different valuation equations. Do the same with the call options too.
Hey Don, Good guess! All things being equal (no change in stock price, IV, etc.), the amount of dividend priced into the put is the delta times the dividend. For reasons I do not comprehend, this does not hold true with near term, more OTM puts. They collapse much more than this amount. To verify this, do as Nazzdack suggested: Use an option calculator to determine pre and post dividend premiums. Spin