A high dividend payout will ________ the value of a call option and ________ the value of a put option.
A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease

Question

Quizplus · Accepted Answer

A high dividend payout means that the stock price is likely to decrease, which will decrease the value of a call option (since call options give the right to buy the stock at a certain price, and a decrease in stock price is unfavorable for the holder of the call option). On the other hand, a decrease in stock price will increase the value of a put option (since put options give the right to sell the stock at a certain price, and a decrease in stock price is favorable for the holder of the put option). Therefore, a high dividend payout will decrease the value of a call option and increase the value of a put option, which is consistent with choice C.

A High Dividend Payout Will ________ the Value of a Call