Value of Option option

jarobi04

I believe when the dividend goes ex the stock price falls

noel

Trying to grasp the concept of why the value of a call option decreases and the value of a put option increases when there are dividends on the underlying stock.

KungFuPanda

When a stock pays a dividend. the price of the stock usually drops ( by the amount of the div approx). This hurts the value of a call option (because the price of the tock falls), but helps a put option (again, cause the price of the stock falls). To compensate for this, calls on these stocks may sell at a "discount" or be cheaper than calls on an indentical security that does not pay dividends (and puts will be more expensive).

needhelp1700

i'm not sure if either of the above answers helped, but here's another way to think about it:

paying a div = paying out equity (essentially, retaining less equity for future growth), which reduces the value of a share.

because calls benefit from value appreciation, paying a div will make value of call decline; by the same token, puts benefit from declining stock values, so puts will appreciate from dividends being paid.

does this help?

bdavi77962

Spanishesk Wrote:
-------------------------------------------------------
> To compensate for this, calls on these
> stocks may sell at a "discount" or be cheaper than
> calls on an indentical security that does not pay
> dividends (and puts will be more expensive).

This is what CFAI books fail to grasp.