Dividends or expected dividends of an underlying stock impacts in a peculiar way the pricing of its derivative be it futures or options. The reason being that once the underlying goes ex-dividend, the market rate of the underlying gets reduced exactly by the amount of dividend declared per share. As a result of this the future market rate of the underlying should be discounted to the extent of the dividend per share.

To understand fully the impact of dividends on the option pricing, you should know that dividends are paid only to the holder of the underlying on the record date. The holders of call options on the same underlying stock however are not eligible to get any dividends. Hence, when dividend is declared by the company, the holders of the underlying stock are benefited to the extent of the dividend declared, while the holders of the call option are deprived of the same. This is reflected in the price of the call option.

Similarly, short sellers of an underlying stock that carries a dividend component are required to pay the dividend to the owner from whom they borrowed the stock which offsets the interest they receive for the short position they hold. This has the effect of increasing the price of a put option whenever dividend is declared on the underlying stock.

In short, an increase in the dividend of the underlying stock has the effect of reducing the call prices and increasing the put prices. A reduction in the dividend has the effect of increasing the call prices and decreasing the put prices.

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