It's ex-dividend date today and the stock went up. Why didn't the stock go down by the dividend amount as many say it would.
Buy / Write
- Thread starter viruscore1
- Start date
If you had a clue about how the stock exchanges handle share price on the ex-dividend date, you wouldn't be asking such silly questions.
That's what I originally said about you. Read the thread, BTW it wasn't a question. You're the one that said the dividend is built in.
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Because stock prices go up and down, including on the dividend dates (in fact, this stock has actually opened down by the dividend amount, but some do not). This is equivalent to measuring the curvature of your side walk and concluding that the earth is flat.
Here is a simple way to prove it to yourself. Take a wide universe of stocks. For each ex-div date calculate the overnight (prior close to open) return and regress it on the dividend proportion (div amount over prior close).
Yup, that's one way to put it. While there are various statistical do-hickies to do around and about dividends, you can't really capture them in an arbitrage sense of that word.
I knew the dividend is baked in. However, the bid/ask will determine the premium. That's why i placed the trade to prove option premium is determined by traders regardless of dividend.
I have skipped the early parts of the thread since it was too adolescent for my taste, so I can't really comment on the trade or the rationale for it.
The general idea for the option pricing with respect to the dividend is pretty simple. As you know, the option premium consists of the time value and the intrinsic value. The intrinsic value is the current expectation of the moneyness - meaning that if you offset your exposure by taking a parity stock position, this portion will be guaranteed. If there is a dividend coming up, it will be accounted for by lowering the expected price of the stock on the ex-dividend date. The expected price of the stock on the expiration date is "the forward" price and it includes borrow, funding and dividends.
Now, for advanced readers who are dying to know "what's there to do around dividends"
First of all, IRL there is some uncertainty about the dividend expectations. Sometimes longer dated stock forwards will be trading too cheap because MMs are too short calls, for example and want to hedge against an unexpected dividend hike. The opposite also could happen. There are more short-dated games involving over-priced dividend convexity in American options.