The call option on a dividend paying stock compared to a non-dividend paying stock is:
A) more valuable because of the extra dividend payment.
B) equal in value because cash dividends are paid on stock only.
C) less valuable because cash dividends are paid on stock only.
D) less valuable if the dividend paying stock is in-the-money while the non-dividend paying stock if out-of-the-money.
E) None of these.

Question

Quizplus · Accepted Answer

The call option on a dividend paying stock is less valuable than a non-dividend paying stock because when the stock pays a dividend, its price will decrease by the amount of the dividend payment. This results in a lower stock price and thus, a lower call option price. This is known as the "dividend drag". Therefore, the value of the call option on a dividend stock is lower compared to a non-dividend paying stock.

The Call Option on a Dividend Paying Stock Compared to a Non-Dividend