Call options and ex-dividend date
Options have been a favourite instrument amongst investors and speculators alike in hedging and protecting their market positions. When the ex-dividend date approaches, the stock is bound to fall.
Factoring that in, is playing with options an easy way to speculate and make some quick money? The company declared on the stock would go ex-dividend on That date falls one day before the ex-dividend date on In order to receive this option, one has to pay a premium.
A call option essentially rises in price when the stock price rises and falls in price when the stock falls. A call option is an option to buy shares of the stock at a strike price up to the expiration date. The buyer of the call option pays a premium to the seller of the call option to purchase this right. Options can be American or European. American options can be exercised before the expiration date while European options can be exercised only on the expiration date.
The difference in both these structures makes American options more expensive than European options. Most options in the US are American. From the date the dividend is declared, the call option price will start falling right up to the ex-dividend date due to the anticipated drop in price.
If the buyer of the call option is in the money, then he can sell the call option and collect the dividend. The seller of the option will deliver the stock to the buyer of the call option.
Why ex-dividend dates are important to options traders - OptionsHouse
The bottom line is that call option prices start adjusting themselves in anticipation of the drop. Put options have the exact opposite effect when stocks go ex-dividend where they rise in price as the stock is anticipated to go down in price. A detailed analysis of put options and the ex-dividend date will follow soon.
Call Options and the Ex-Dividend Date
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Find out how ex-dividend dates can affect options strategies
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