Stock Dividends and Its Impact on Options

Stock Dividends and Its Impact on Options

Although dividend is not a Greek component of any Option, it has a direct impact on the values of Calls and Puts. For this reason, it is important to understand how dividend payouts positively or negatively impact Option values.

I will refrain from a lengthy post on this topic, in part because I'm still struggling to understand the technicalities myself.

Aside from the actual reasoning and explanation of how dividend payouts affect Calls and Puts, it is at least important to note this general phenomenon.

On Ex-Div Date (commonly known as XD to Singapore traders/investors) :

a) ITM Call values will be lower
b) ITM Put values will be higher

Deep OTM Calls and Puts will largely be unaffected by dividend payouts.

It is also for this reason that a day before XD, open interests and trade volume for these ITM options will see gigantic spikes. It has nothing to do with market place opinion on direction of the underlying price movement. Thus, trying to decipher the directional bias based on open interests of the Calls and Puts in especially just before XD will be misleading and inaccurate.

If there's anyone who can succinctly explain this phenomenon, please post here. My brain is all jammed up putting together the details of this outcome. Thanks in advance.