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+Dividends and Option Pricing
+The preceding discussion demonstrated how dividends affect stock traders.
+There’s one problem: we’re option traders! Option holders or writers do not
+receive or pay dividends, but that doesn’t mean dividends aren’t relevant to
+the pricing of these securities. Observe the behavior of a conversion or a
+reversal before and after an ex-dividend date. Assuming the stock opens
+unchanged on the ex-date, the relationship of the price of the synthetic stock
+to the actual stock price will change. Let’s look at an example to explore
+why.
+At the close on the day before the ex-date of a stock paying a $0.25
+dividend, a trader has an at-the-money (ATM) conversion. The stock is
+trading right at $50 per share. The 50 puts are worth 2.34, and the 50 calls
+are worth 2.48. Before the ex-date, the trader is
+Long 100 shares at $50
+Long one 50 put at 2.34
+Short one 50 call at 2.48
+Here, the trader is long the stock at $50 and short stock synthetically at
+$50.14—50 + (2.48 − 2.34). The trader is synthetically short $0.14 over the
+price at which he is long the stock.
+Assume that the next morning the stock opens unchanged. Since this is
+the ex-date, that means the stock opens at $49.75—$0.25 lower than the
+previous day’s close. The theoretical values of the options will change very
+little. The options will be something like 2.32 for the put and 2.46 for the
+call.
+After the ex-date, the trader is
+Long 100 shares at $49.75
+Long one 50 put at 2.32
+Short one 50 call at 2.46
+Each option is two cents lower. Why? The change in the option prices is
+due to theta. In this case, it’s $0.02 for each option. The synthetic stock is
+still short from an effective price of $50.14. With the stock at $49.75, the