Ex-dividend Date Impact on Option Prices
Ex-Dividend Impact on Call and Put Option Prices:
The term "ex-dividend" means "without dividend." Many of the larger, established, profitable companies pay out a portion of their profits to shareholders in what is known as a dividend. Dividends are typically paid out in even amounts on a quarterly basis. General Electric (GE), for example, pays out $0.68 a year or $0.17 per quarter. If GE pays out the $0.17 to shareholders of record on April 15th, then you must own the stock on the 15th to get the dividend. So if you bought the stock on April 16, the day it goes "ex-dividend" then you would not get that April 15th dividend payment of $0.17.
Why is the ex-dividend date important for option traders?
The ex-dividend date is important for option traders because it directly impacts the stock price. If you know that if you own GE on April 15th you get 17 cents and if you were to buy it on April 16th then you would NOT get the 17 cents, then what we typically see is the price of GE drops 17 cents the day it goes ex-dividend. So, if you are looking to buy a call option on a stock that is about to go ex-dividend, then you know that the price of the stock will drop the dividend amount what is BAD if you own calls. Conversely, if you own a put, then the dividend payment is a GOOD thing because you know the price will drop.
Important Tip: When you are thinking of buying a call option on a stock and you are comparing prices, sometimes you will see prices that just seem really cheap and that are too good to be true. It might be because the option traders know that the stock is about to drop.
Here are the top 10 option concepts you should understand before making your first real trade: