Positive cash flows in the form of dividends will lower the price of the stock making it closer to being “in the money” which increases the value of the put option as the stock price gets closer to the strike price. In this sentence, how is possible to make the price of the stock lower with dividend payments, can somebody please explain? Thanks in advance.
You may recall from Level I that on the ex-dividend date the price of the stock drops by the amount of the dividend (though, technically, it should drop by the present value of the dividend): if you own the stock before that date you get the dividend, otherwise you don’t get the dividend.
Yes, if I understand correct, this is in line with the clean surplus concept. Dividends reduce the shareholders’ equity. But doesn’t it contradict with constant growth model? If g increase, D increase and which subsequently increase the intrinsic value of the stock. Thank you.
I don’t see how it has anything to do with the clean surplus concept.
No.
That’s an idealized, long-term, smoothed model.
We’re talking about a short-term effect.
The price of a share of stock is $22.50. If you buy it today, you get the quarterly dividend of $0.25. If you buy it tomorrow, you don’t get that dividend. Assuming no other factors affect the price between today and tomorrow, what do you think tomorrow’s share price will be?
Also considering the title of this thread, what does any of this have to do with option Greeks and dynamic hedging?
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Yes, I get it now. Thank you very much.
My pleasure.