CHAPTER 8
Dividends and Option Pricing
Much of this book studies how to break down and trade certain components
of option prices. This chapter examines the role of dividends in the pricing
structure. There is no greek symbol that measures an option’s sensitivity to
changes in the dividend. And in most cases, dividends are not “traded” by
means of options in the same way that volatility, interest, and other option
price influences are. Dividends do, though, affect option prices, and
therefore a trader’s P&(L), so they deserve attention.
There are some instances where dividends provide ample opportunity to
the option trader, and there some instances where a change in dividend
policy can have desirable, or undesirable, effects on the bottom line.
Despite the fact that dividends do not technically involve greeks, they need
to be monitored in much the same way as do delta, gamma, theta, vega, and
rho.