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How dividends affect option prices (and why puts cost more)

A stock usually drops by about the dividend on the ex-dividend date, and option prices know that in advance. So a coming dividend makes calls cheaper and puts more expensive. It also gives call owners a reason to exercise early, the day before the ex-date.

Options guide · 8-minute read · Updated 2026-11-01

The short answer

On the Ex-dividend date, a stock usually opens lower by about the size of the dividend. The cash has left the company and gone to shareholders.

Option buyers and sellers know this ahead of time. So options are priced as if the stock were already that much lower:

• Calls get cheaper. A call pays off when the stock goes up. A known drop works against it.
• Puts get more expensive. A put pays off when the stock goes down. A known drop helps it.
• In-the-money calls may be exercised early, the day before the ex-date, so the owner can collect the dividend.

The option holder never gets the dividend. Only the person who owns the shares at the right time does. More on how dividends work in dividend investing explained.

Why a known drop changes the price

Option prices are built around where the stock is expected to be at expiry, not just where it is now. A dividend paid before expiry pulls that expected level down by about the dividend.

Think of it this way. A stock at $50 that will pay a $1.00 dividend next month is, for option pricing, closer to a $49 stock. The $50 call is now about $1 out of the money. The $50 put is about $1 in the money.

Here's an illustration with rounded numbers (hypothetical, ignoring interest rates). The stock is at $50. Both options expire in 60 days with a $50 strike.

The check: with the same strike and expiry, call minus put should be close to the stock price, minus the dividend, minus the strike. That's $50 − $1 − $50 = −$1.00. That relationship is called put-call parity. It's why the gap between the call and the put is about the size of the dividend.

Interest rates push a little the other way, which is why real prices won't match these round numbers exactly. See how options are priced.

Does the price jump on the ex-date?

Usually not. Because the drop was priced in weeks ago, options don't suddenly reprice when the stock opens lower. The stock falls by about the dividend, and the options barely react to that part of the move.

That's also why buying puts right before the ex-date to "catch the drop" doesn't work. You paid for the drop in the put's price.

A worked example where the put goes against you

Selling a cash-secured put before a dividend looks attractive: the put pays more. Here's how that plays out when the stock keeps falling (an illustration, not a trade idea).

A made-up stock, XYZ, trades at $50 with a $1.00 dividend coming. You sell the 60-day $50 put for $2.55, so $255. You set aside $5,000 in case you're assigned.

The stock drops by the dividend on the ex-date, then keeps sliding. At expiry it's at $46. You're assigned.

Check it the other way. Your break-even is $50 − $2.55 = $47.45. The stock ended $1.45 below that. 100 × $1.45 = $145.

The extra premium was real. It was also payment for a drop the market knew was coming. It didn't protect you from the rest of the fall. For how this fits into a full cycle, see the wheel strategy.

Covered calls: the day-before check

If you own shares and sold a call that's in the money, a dividend raises the odds of early assignment. The owner of the call can exercise the day before the ex-date, become a shareholder, and collect the dividend.

They'll do it when the dividend is bigger than the call's time value (its price minus how far it's in the money).

Say you own 100 shares of XYZ at $50 and sold a $45 call (hypothetical). The day before the ex-date, the call trades at $5.10. It's $5.00 in the money, so the time value is just $0.10. The dividend is $1.00.

$1.00 is far bigger than $0.10, so expect assignment. You sell at $45 and miss the dividend. The full rule and what to do about it are in early assignment before a dividend. The early assignment dividend calculator runs the check for you.

Covered calls and qualified dividends

In the US, a covered call can also change how your dividend is taxed. Qualified dividends need a minimum holding period. The IRS adds this rule for in-the-money covered calls: The holding period of the stock does not include any period during which you are the writer of the option (for a qualified covered call with a strike below the applicable stock price). Source: irs.gov.

In plain words: while you have an in-the-money covered call open, the clock on your holding period can stop. Fall short and the dividend is taxed at your regular rate instead of the lower qualified rate. The qualified dividend holding period calculator checks your dates. See also Qualified dividend.

In Canada, covered calls are widely allowed in a TFSA or RRSP. Cash-secured puts depend on the broker, and options permissions differ from broker to broker.

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