Dividends and Their Effect on Options

What this video covers

• Why ordinary cash dividends change option premiums but never change the strike price or contract size, and the trap that only stock splits and stock dividends adjust contract terms
• How the ex-dividend stock price drop decreases call premiums and increases put premiums, and why the market prices this in before the ex-date arrives
• Why a call holder must exercise and take delivery before the ex-dividend date to qualify as stockholder of record and capture the cash dividend
• The three conditions for rational early exercise of an American-style call: deep in the money (ITM), remaining time value less than the dividend amount, and expiration relatively near
• Why exercising forfeits remaining time value, so the dividend must exceed that time value for the math to work
• When a short call writer faces the highest assignment risk: the day before the ex-date, not on the ex-date itself
• The single most common reason an American-style call is exercised early: dividend capture on a deep ITM contract