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If I buy an at the money straddle, hoping to profit from a volatility increase, then how does an underlying dividend announcement affect my PnL?

I am thinking that if the underlying announces a dividend, then the call premium will drop(gradually between now and the ex div date) and the put premium will rise.

So will these two offset each other completely? What else should I be aware of?

I am referring to an ATM straddle position.

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When dividend is announced the stock and option price may react to that news, but the actual payout of the dividend on the ex-dividend date is what you probably are referring to.

The dividend payout affects the stock price on the ex-dividend date as the stock price will drop by the amount of paid out dividend (not taking into account other factors). This in turn drives the prices of all options.

The amount of change in the option price for this event is not only dependent the dividend payout, but also on how far these are in our out of the money and what there time to expiration is. The price of a call option that is far out of the money would react less than the price of a put that would be far in the money.

Therefore I would argue that these two will not necessarily offset each other.

  • I am referring to both options at the money. Thank you. – Victor123 May 4 '15 at 0:22
  • A pending dividend increases put premium and decreases call premium. Give or take a few cents, the dividend would have no effect on the value of your ATM straddle. – Bob Baerker Sep 21 '18 at 23:51

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