Here is the formula that one could use to calculate the Implied dividend yield:

PV(Dividend) = -CALL + PUT + (Spot - Strike) + ((Strike * exp(r*T)) - Strike)

where r is the interest rate to expiration. T is the time to maturity in Years.

Implied Dividend Yield = PV(Dividend)/(T * Spot)

Taking the Example of PFE, Pfizer Inc

Taking the Option prices of June 2010 Expiration

Spot = 18.49

CALL = 1.72

PUT = 1.52

r = 0.16%

T = 0.5 (Approx)

ATM Strike = 18

Substituting the above values into the equation below:

PV(Div) = -1.72 + 1.52 + (18.49-18)+ ((18 * exp(0.0016*0.5))-18)

PV(Div) = 0.3044

Implied Dividend Yield = 0.3044/(0.5 * 18.49) = 0.0329 = 3.29%

To Express an opinion that the dividend yield will be reduced, one should go long PFE June 2010 18 CALL, Short one June 2010 18 PUT, and SHORT 100 shares of PFE stock.

To Express an opinion that the dividend yield will be increased, one should go short PFE June 2010 18 CALL, long one June 2010 18 PUT, and long 100 shares of PFE stock.

## 11 comments:

Good post!

Stock borrow cost is also a factor in this.

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