Dividends have a significant impact on the pricing of options, particularly in the days leading up to the ex-dividend date. This impact stems from the fact that the underlying stock's price is expected to decline by the amount of the dividend on the ex-dividend date.
Let's analyze the effect on call and put options:
Impact on Call Options:
Decreased Value: Dividends decrease the value of call options. This is because the underlying stock price is expected to drop, making the call option less likely to expire in-the-money.
Example: Consider a call option with a strike price of $100, and the stock currently trades at $110. If a $2 dividend is....
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