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+Appendix C: Put-Call Parity   • 291
+acts as a “negative drift” term in the BSM. When a dividend is paid, theory 
+says that the stock price should drop by the amount of the dividend. Be-
+cause a drop in price is bad for the holder of a call option, the price of a call 
+option is cheaper by the amount of the expected dividend.
+Thus, for a dividend-paying stock, to establish an option-based position 
+that has exactly the same characteristics as a stock portfolio, we have to keep 
+the expected amount of the dividend in our margin account.
+1 This money 
+placed into the option position will make up for the dividend that will be 
+paid to the stock holder. Here is how this would look in our equation:
+C
+K − PK + (K − Int) + Div = S
+With the dividend payment included, our equation is complete.
+Now it is time for some algebra. Let’s rearrange the preceding equa-
+tion to see what the call option should be worth:
+CK = PK + Int − Div + (S − K)
+Taking a look at this, do you notice last term (S  – K )? A stock’s price 
+minus the strike price of a call is the intrinsic value. And we know that 
+the value of a call option consists of intrinsic value and time value. This 
+means that
+/dncurlybracketleft/dncurlybracketmid/horizcurlybracketext/horizcurlybracketext/dncurlybracketright/horizcurlybracketext/horizcurlybracketext/dncurlybracketleft/dncurlybracketmid/dncurlybracketright=+ −−CP SKKK IntD iv + ()
+Time valueI ntrinsic value
+So now let’s say that time passes and at the end of the year, the stock 
+is trading at $70—deep ITM for our $50-strike call option. On the day 
+before expiration, the time value will be very close to zero as long as the op-
+tion is deep ITM. Building on the preceding equation, we can put the rule 
+about the time value of a deep ITM option in the following mathematical 
+equation:
+P
+K + Int − Div ≈ 0
+If the time value ever falls below 0, the value of the call would trade for less 
+than the intrinsic value. Of course, no one would want to hold an option 
+that has negative time value. In mathematical terms, that scenario would 
+look like this:
+P
+K + Int − Div < 0