James is long the calls, he loses 1.52 per option. If, however, he were short
the calls, 1.52 would be his profit on each option.
Put traders are affected as well. Another trader, Marty, is long the 60-
strike XYZ puts. Before the dividend announcement, Marty was running his
values with a $0.10 dividend, giving his puts a value of 5.42. Exhibit 8.3
compares the values of the puts with a $0.10 quarterly dividend and with a
$0.50 quarterly dividend.
EXHIBIT 8.3 Effect of change in quarterly dividend on put value.
When the dividend increase is announced, Marty will benefit. His puts
will rise because of the higher dividend by $0.66 (all other parameters held
constant). His long-term puts with six quarters of future expected dividends
will benefit more than short-term XYZ puts of the same strike would. Of
course, if he were short the puts, he would lose this amount.
The dividend inputs to a pricing model are best guesses until the dates
and amounts are announced by the company. How does one find dividend
information? Regularly monitoring the news and press releases on the
companies one trades is a good way to stay up to date on dividend
information, as well as other company news. Dividend announcements are
widely disseminated by the major news services. Most companies also have
an investor-relations phone number and section on their web sites where
dividend information can be found.