How Dividends Can Reduce the Value of Long-Dated Deep In-the-Money Calls

Summary

The question compares a stated reference value for SPY with a lower quoted value for deeply in-the-money FLEX calls and asks why the contracts appear to have been purchased at a discount. One answer offers expected dividends as an explanation: when a call holder does not receive dividends paid by the underlying shares, anticipated distributions over the option’s remaining life can reduce the call’s value relative to a simple comparison with the reference price. The answer uses an intrinsic-value-style calculation and assumes no time value to illustrate the effect.

That calculation is an approximation, not a full option valuation. The discussion does not establish the precise trade price or contract terms, and another answer suggests that the reference value may not be the actual underlying price at purchase. The excerpt therefore highlights dividend carry as a possible source of an apparent discount, while leaving open whether price timing, valuation conventions, or other contract details explain the specific figures.

Key ideas

• Expected dividends can lower call values because option holders do not receive distributions paid to stockholders.
• The answer illustrates the effect with a simplified calculation that assumes zero time value.
• A reference value may differ from the underlying price when the option was purchased.
• The excerpt does not verify the actual transaction price or fully value the FLEX contract.

Tags

# Why are these deep in-the-money FLEX options seemingly bought at a discount?


# Why are these deep in-the-money FLEX options seemingly bought at a discount?












98% of the initial reference value is .98 x 267.88 dollars, which equals 262.52 dollars. However, the market value of each call contract they purchase is 247.42 dollars.

How are they purchasing these call options at a discount?

Here's the link to the prospectus (the reference value is on page 8, and the options price is on page 21): https://mplusfunds.com/defined-preservation-95-fund-fact-sheet-standard/prospectus-alaia-series-7-1-defined-preservation-95-fund-10-31-18/

## Answer by ryc (score 4)

https://quant.stackexchange.com/a/55816

SPY pays dividends ~1.8%, and the expiry is ~3y (as of date was 2018, 2021 expiry), so the it looks like there is a discount

- Assuming $0 time value

$$OptionValue=Intrinsic Value+Time Value $$ $$OptionValue= (S-K)-Dividend$$ $$OptionValue=267x(1-0.02)-267x1.8\%x3=\\\$247$$

## Answer by Preston Lui (score 1)

https://quant.stackexchange.com/a/55814

I suspect that the reference value is, well, only for reference and not the real price.

Maybe the price of SPY when the call contract is bought is lower

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.