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Implied dividend

The dividend stream backed out of option prices via put-call parity; the market's forecast, which can differ from the company's announced policy.

Rearrange put-call-parity and, with rates known, the only unknown left is the dividend the market expects before expiry. Doing this across expirations produces a term structure of expected payouts — a genuine forecast produced by people with money at stake.

It is most informative when it disagrees with consensus. A dividend implied well below the current payout is the options market pricing a cut, often earlier and more decisively than analysts do. It also explains option prices that otherwise look mispriced.

Example: XYZ at $50 pays $0.30 a quarter. Parity on the 90-day chain implies a $0.12 dividend. Either the market expects a cut, or your borrow rate assumption is wrong — and in a hard-to-borrow name the second explanation is usually the right one.

Related: put-call-parity, implied-forward, dividend-risk, early-assignment

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Payoff of a long call at expiryA flat loss equal to the premium below the strike, turning upward at 45 degrees above it.Profit / loss per share08595115125Strike 105Max loss 3 — the premium paidBreakeven 108Profit keeps growingUnderlying price at expiry
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.

Educational only, not advice. Spotted an error? Post in Site Feedback.