If a company increases its regular dividend, what happens to the price of calls on the stock?
the option will track the stock until ex-div. So if the news of an increased div causes the stock to increase that the call option will increase and vice versa. However, the call will loss greater value after ex-div due to the increased dividend.
HIGHER dividend = LOWER call option premium. Since the dividend belongs to the person who owns THE STOCK…not the option, the shares will be comparatively more valuable relative to the options. Willy
And just for historical reference, this was Merton’s contribution to the Black-Scholes equation (or at least this was what is credited to him). Merton published his paper either slightly before or slightly after Black & Scholes published their landmark paper. (Publishing that paper was really tough and was finally published in a 2nd rate journal after Black published a paper in Journal of Finance suggesting the result in a paper he couldn’t get published).