The call option on a dividend paying stock compared to a non-dividend paying stock is:
A) more valuable because of the extra dividend payment.
B) equal in value because cash dividends are paid on stock only.
C) less valuable because cash dividends are paid on stock only.
D) less valuable if the dividend paying stock is in-the-money while the non-dividend paying stock if out-of-the-money.

Question

Quizplus · Accepted Answer

The value of a stock option is based on the stock's future price, volatility, time to expiration, and interest rates. Dividends are a separate and distinct component of a stock's price, with their own effects on the stock's value. Cash dividends do not affect the price of the option, but they do reduce the price of the underlying stock. Therefore, a call option on a dividend-paying stock is less valuable than one on a non-dividend paying stock, because the option holder is missing out on the dividend payment.

The Call Option on a Dividend Paying Stock Compared to a Non-Dividend