Dividends and Their Effect on Options

What this video covers

• Why ordinary cash dividends do not adjust option contract terms (strike price and contract size stay fixed) and how special non-recurring distributions are the exception where the Options Clearing Corporation (OCC) may intervene
• How the ex-dividend date creates inverse premium movement: call premiums decrease and put premiums increase as the stock price drops by approximately the dividend amount
• The market's anticipation of the ex-date price drop and why premium changes happen before the actual ex-date
• The three conditions required for rational early exercise of an American-style call: deep in-the-money (ITM), remaining time value strictly less than the dividend, and expiration relatively near
• Why early exercise must occur the day before the ex-dividend date, not on the ex-date, to qualify for dividend capture
• What elevated assignment risk means for short call writers and when they face the highest probability of being assigned
• The Finra exam trap of confusing the timing of exercise (day before ex-date) with the ex-date itself, and the trap of assuming early exercise is automatic rather than conditional on time value versus dividend size