What is the efec f Stock+put options againts the Dividend?

Question

hi, i need to know this one,

let say i bought 100 shares (let say at $100/share) PLUS 1 contract Put (say i paid $10/share) Strike 100

What happen when the stock declare DIVIDEND? (say the dividend is $4)

1. i know that the stock will go down to $96, but what happend with the PUT premium? will it go higher(the call premium lower, the put go higher)?

2. when the stock down to $96, can i still EXERCISE the Put and sell my stock at $100?

thx

Answer 1

You are asking questions about the theoretical world of stock and option trading.

What happens in theory and what happens in the real world are related, but in very complex ways.

In short, when discussing things in theory, everything happens in real time but in the real world everything happens "in anticipation" (in the past about what they think and know about what will happen today).

In theory, the put premium would go down as the dividend payment moves the stock price further from "in the money" before expiration.  

In the real world, however, the price you initially paid for the put will anticipate the dividend payment thus "ensuring" that you cannot profit from such a trade on a regular basis, all other things being equal.

Keep in mind "all things being equal."

Keep in mind that you have hundreds of thousands of smart men and women (and computers) trolling the financial marketplace 24/7 for easy money as their JOB.  The odds of you finding it REGULARLY are zero.

Great White Shark Going to Eat You Up.

Answer 2

Option market makers will account for the phenomenon you've described when they price the puts.  Thus, the price of the puts you buy will be high enough to cover this cost.  These guys aren't stupid.

But, sure you could exercise your put when the stock goes down to $96 but stop and do the math.  You bought the stock at $100, you sell it at $100 by exercising your put, you've collected the $4 dividend but you paid $10 for the put.  You're out $6.

And I don't know what that first responder is smoking.  EVERY stock goes down by the amount of the dividend on the ex-dividend day.  Also, "strike 100" states the strike price pretty clearly to me.

Answer 3

I'm not sure what stock you re dealing with, but there are no stocks that I am familiar with that now devalue along with the dividend. Stocks today are valued taking into account the fact that there could be a dividend in the future. The put should trade irrespective of the stock, however if the stock is truly going to go down to 96 then the premium of the put would obviously go higher since you are either closer or more firmly in the money. (you didn't state the strike price)