can someone explain to me intuitively why a higher dividend yield will decrease the value of an option? Kind of why it makes sense and not just be seeing that it works w/ an option pricing forumula. appreciate it.
“call” option only.
In theory, if you have a call on a stock currently trading at $22, with a strike of $20, it should be worth at least $2. But if the stock pays a $1 dividend, its price will drop by $1, so it will trade at $21, and t he call option will be priced at $1.
In reality, this is not true at all… and I have mentioned why numerous times here on this board.
Just think that if you own the option, you are not entitled to the dividend of the underyling.
Call option = no dividend = value is less
One of the definition of the price of a stock is the PV of all future dividends. Let say a stock is worth $50 and has 10 dividends. Now let’s say you only get 9 dividends wouldn’t the stock be worth less than $50. The amount that the stock will decrese by would be equal to the present value of the missing dividend.
So the higher the dividend payment the lower the price decrease for the stock (since investors who don’t own the stock won’t get the dividend).