The payment of dividends for a stock impacts how options for that stock are priced. Stocks generally fall by the amount of the dividend payment on the ex-dividend date (the first trading day where an upcoming dividend payment is not included in a stock's price). This movement impacts the pricing of options. Call options are less expensive leading up to the ex-dividend date because of the expected fall in the price of the underlying stock. At the same time, the price of put options increases due to the same expected drop. The mathematics of the pricing of options is important for investors to understand so they can make informed trading decisions.

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### Stock Price Drop on Ex-dividend Date

The record date is the cut-off day, set by the company, for receipt of a dividend. An investor must own the stock by that date to be eligible for the dividend. However, other rules also apply.

If an investor buys the stock on the record date, the investor does not receive the dividend. This is because it takes two days for a stock transaction to settle, which is known as T+2. It takes time for the exchange to process the paperwork to settle the transaction. Therefore, the investor must own the stock before the ex-dividend date.

The ex-dividend date is, therefore, a crucial date. On the ex-dividend date, all else being equal, the price of the stock should drop by the amount of the dividend. This is because the company is forfeiting that money, so the company is now worth less because the money will soon be in the hands of someone else. In the real world, all else does not remain equal. While, theoretically, the stock should drop by the amount of the dividend, it could rise or fall even more since other factors are acting on the price, not just the dividend.

### The Bottom Line

As a general guide, put options will increase slightly prior to a dividend and call options will fall slightly. This assumes all else remains equal which, in the real world, is not the case. Options will start pricing the stock price adjustment (related to the dividend) well ahead of when the stock price adjustment actually occurs. This implies micro movements in the option price over time, which are likely to be overwhelmed by other factors. This is especially true with small dividend payments, which are a very small percentage of the share price. Dividends that are substantial, such as high yield dividends, will have a more noticeable impact on share and option prices.