What will be Impact of Dividend on Derivatives Positions?

What will be Impact of Dividend on Derivatives Positions?

Cash dividends impact option prices by influencing the underlying stock price. As the stock price typically decreases by the dividend amount on the ex-dividend date, higher cash dividends tend to result in lower call premiums and higher put premiums.

Although the stock price generally undergoes a single adjustment equal to the dividend amount, option prices anticipate dividends well before they are officially announced. It's essential to consider the dividends paid when calculating the theoretical price of an option and assessing potential gains and losses when analysing a position. This principle extends to stock indices, where dividends from all constituent stocks (adjusted for their weight in the index) should be factored in when determining the fair value of an index option.