What Occurs with Options on Ex-Dividend Date?

What Occurs with Options on Ex-Dividend Date?

When a company declares a dividend, it usually sets an ex-dividend date. On this date, the stock starts trading without the dividend, meaning that anyone who buys the stock on or after this date will not receive the upcoming dividend payment. But what happens with options on ex-dividend date?

Options prices and premiums

Options prices and premiums are affected by various factors, including the underlying stock price, time to expiration, implied volatility, and interest rates. Dividends can also have an impact onoptions prices, especially for call options. This is because call options give the holder the right to buy the underlying stock, and if the stock pays a dividend, the price of the stock will decrease by the amount of the dividend on the ex-dividend date. As a result, the call option will become less valuable, and its price will decrease accordingly.

Dividend risk

Options traders need to be aware of dividend risk, which is the risk of holding an option through the ex-dividend date and being assigned the obligation to deliver the stock and receive the dividend payment. This can happen if the option is in-the-money, meaning that the option's strike price is lower than the current market price of the underlying stock.

To avoid dividend risk, options traders can either close their positions before the ex-dividend date or adjust their positions by buying or selling stock or other options. For example, they can buy the underlying stock to hedge their call options or sell call options to offset their long call positions.

Assignment and exercise

Options holders have the right to exercise their options at any time before the expiration date. However, options writers (sellers) can be assigned the obligation to deliver the underlying stock if the option is in-the-money and the holder chooses to exercise the option. This can happen even if the option is out-of-the-money by only a few cents.

On the ex-dividend date, options writers may also faceassignment riskif their options are in-the-money and the holder decides to exercise the option to receive the dividend payment. As a result, options writers may need to deliver the stock and receive the dividend payment, which can lead to unexpected costs and risks.

Conclusion

In summary, options on ex-dividend date can be affected by various factors, including the underlying stock price, time to expiration, implied volatility, interest rates, and dividend payments. Options traders need to be aware of dividend risk, assignment risk, and other potential risks and costs associated with holding or writing options through the ex-dividend date. By understanding these factors and risks, options traders can make informed decisions and develop effective strategies to manage their options positions.