Options and dividends

[gijoe9]

If I buy options calls or puts of a company that has a Div how does this effect the premium I pay? What are the liabilties of having contracts on a stock that pays a dividend? Will writing a contract call or put obligate me to give dividends away in some way? Who gets the dividend of a stock that is under a contract? I know that if I short an equity and it pays a dividend I pay it to whom ever leant me the stock during the time I am short on it. (leraned that the hard way) Any help will be appreciated.
Thank you
Joe

[Stocktrading101]

That is an excellent question, and to be honest I am not sure exactly. Thinking about it though, I would assume the value of the dividend is encorporated into the value of the option overall. With options though you are only selling or buying the rights to a specific stock at x price. During the time that you hold that option, no one is collecting dividends because no one owns the stock (considering the writer of the option is naked). Shorting is different obviously because stock is still owned by one of the parties.

Just my 2 cents.

[WallStGolfer31]

Originally Posted by gijoe9

If I buy options calls or puts of a company that has a Div how does this effect the premium I pay? What are the liabilties of having contracts on a stock that pays a dividend? Will writing a contract call or put obligate me to give dividends away in some way? Who gets the dividend of a stock that is under a contract? I know that if I short an equity and it pays a dividend I pay it to whom ever leant me the stock during the time I am short on it. (leraned that the hard way) Any help will be appreciated.
Thank you
Joe

When buying an option you are purchasing the RIGHT to buy the underlying at the given strike price. Yo do not collect dividends becasue you are only purchasing the right to buy it, not the actual stock.

Dividends are not part of the traditional Black and Sholes(sp?) valuation forumla. They are not incorporated into the price unitl it effects the underlying.

If you purchase a Call and the board announces the quaterly dividend the stock will rise the ammount of the dividend(or more) and so will the option.

If you buy a put, it will decrease the value of the put option upon the announcment.

At the ex-date you will find the opposite occurs.

The call option will decrease, becasue the underlying usually decreases the ammount of the dividend on the ex-date.

The put option will increase becase the underlying decreases in price according to the ammoutn of the future dividend.


The ammount of increase and the ammount of decrease will depend heavily upon the delta of the option.

The delta is just the change in the options price divided by the change in the stock price. Or Delta = N(d1) for those of you who are using the B&S forumla.

[gijoe9]

I think I get this now. If I write an option on a stock I hold then i keep the dividend? Yes I think. thanks for the answers to my question and the heads up on the effects of Dividends on the calls and puts. I gusess a special dividend would be an oportunity to make money on calls and puts? FNF had one for $10 in the last year and that must have been a head ache for the options traders. Is there a place to find historical prices for options chains? I would like to look into the reactions of FNF during that special dividend.

Thank you
Joe