💰 Stock Option Dividend Yield

Definition

Dividend yield is the annual dividend paid by a company divided by its current stock price.
In the context of options, it affects the pricing of contracts—especially calls—by influencing the expected return from holding the underlying stock.

Why It Matters

Call Option Pricing: Higher dividend yields reduce call option values, since holders miss out on dividends.
Put Option Pricing: Dividend payouts can increase the value of puts due to anticipated stock price drops on ex-dividend dates.
Early Exercise Risk: High dividend yield increases the chance of early call exercise to capture dividends.
Model Adjustments: Dividend yield is a key input in pricing models like Black-Scholes.

Example

Suppose a stock trades at $100 and pays an annual dividend of $3. The dividend yield is:
Dividend Yield = $3 / $100 = 3%
In options pricing, this 3% yield would reduce the theoretical value of call options and slightly increase the value of put options.

Key Insights

Dividend Yield Impact	Option Type	Effect
High Yield	Call Options	Lower value; risk of early exercise
High Yield	Put Options	Higher value; reflects expected price drop
Zero Yield	All Options	No dividend-related adjustment needed