what happens to options when a co pays a dividend?

ex. PFE is going to pay a dividend the 1st week of feb. what happens to the feb 15 strick price options when the dividend is paid. The stock will adjust .32 down the next day, will anything happen to the options?

Update:

i recently bought the march 15 calls . I paid .98 when the common was trading at 15.65. so i paid a .35 premium for time. are you saying i paid the .35 cents plus the .32 cents for the divvidend. so i really paid a .67 cent premium?

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  • 1 decade ago
    Favorite Answer

    Nothing happens to the options unless the dividend is considered "extraordinary." Usually the dividend has to be over 10% of the stock price to be considered extraordinary.

    If the dividend is considered extraordinary, the options will be adjusted. For examples of an extraordinary dividend adjustment see

    http://www.cboe.com/tradtool/ContractsDoc.aspx?DIR...

    and

    http://www.cboe.com/publish/TTStockSM/04-595.pdf

    If you are thinking that you might be able to use options to profit from what is essentially a predetermined change in the stock price, forget about it. Because everyone knows the stock price will adjust by the amount of the dividend, the options which expire after that date already have that price change factored into their prices.

    There is one impact that a dividend can have on options. Just before the stock goes ex-dividend some deep in the money call options are likely to be exercised and, to a lesser extent, just after the the stock goes ex-dividend some deep in the money put options are likely to be exercised.

    Addendum

    <<<i recently bought the march 15 calls . I paid .98 when the common was trading at 15.65. so i paid a .35 premium for time. are you saying i paid the .35 cents plus the .32 cents for the divvidend. so i really paid a .67 cent premium?>>>

    I assume you meant to say when the stock was trading at $15.63 instead of $15.65. Unless you sell or exercise the option before the stock goes ex-dividend Feb. 4, 2009, yes, you effectively paid a $0.67 premium.

    Source(s): Basic knowledge of option pricing.
  • 3 years ago

    there are a number of reasons that a business corporation would not pay a dividend....something from: no longer rewarding sufficient, re-making an investment their earnings, increasing the business corporation, and learn and progression of latest products. As an investor i seem for shares that develop extra desirable than pay dividends...large in the event that they do the two, yet there are alot of relatively sturdy investments the place the value boost offsets the certainty you at the instant are not receiving a three% dividend. It truly relies upon on what you elect to take a place in, in case you like the dividend cashflow then do a seek on any of the financial web pages for top paying dividend co.s and that i'm optimistic you will come across a catalogue. sturdy success

  • Anonymous
    1 decade ago

    1. if the stock price down, the call option premium will go down.

    2. no, you pay the difference between stock price and strike price, and the rest is the time value.

    Source(s): Online Options Trading http://onlineoptionstrading.blogspot.com/
  • 1 decade ago

    really great question lol

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