I trade in the options market, mostly with vertical credit spreads. If one of my underlyings has a dividend coming up, does that affect my holdings? My guess is that the short and long position would offset each other but I've never been through a dividend cycle. Is my assumption correct?
1 Answer
On the ex-dividend date, share price is reduced by the amount of the dividend. This is factored into option prices (a dividend increases the value of puts and decreases the value of calls). How much this affects the respective put and call depends on whether the option is ITM, ATM or ITM (ITM puts increase the most and ITM calls decrease the most).
How much this affects you depends not only on whether ITM/ATM/OTM but on whether you are buying the spread or selling the spread as well. For a vertical put spread, the higher strike will be affected more than the lower strike.
If you play around with a competent option pricing model, you'll be able to see this numerically.