Will the dividend increase affect the pricing and volatility of BMI options and futures contracts?
Short answer:
Yes – an 18 % dividend increase will have a measurable impact on both BMI options and futures contracts. The change will be reflected in the underlying stock’s forward‑price dynamics (through a higher dividend yield) and will therefore affect option‑pricing inputs (especially the forward price and implied volatility) and the pricing of the cash‑settled BMI futures that are tied to the same underlying equity.
Below is a step‑by‑step breakdown of the mechanisms, the likely magnitude of the effect, and the practical implications for traders and risk‑managers.
1. What the news actually changes
| Item | Before | After (effective 22 Aug 2025) |
|---|---|---|
| Quarterly dividend | $0.34 per share | $0.40 per share |
| Annual dividend (4×) | $1.36 per share | $1.60 per share |
| Dividend yield (assuming a $150‑ish price) | ≈ 0.91 % | ≈ 1.07 % (≈ +0.16 % absolute) |
The board announced an 18 % increase in the quarterly payout, which translates into a ~18 % rise in the annual dividend from $1.36 to $1.60 per share. The dividend will be paid on 5 Sep 2025 to shareholders of record on 22 Aug 2025 (the “record date”). The ex‑dividend date—the first day the stock trades without the right to receive the dividend—is typically one business day before the record date (i.e., 21 Aug 2025).
2. How dividends feed into option pricing
2.1 Forward‑price (or “spot‑minus‑present‑value‑of‑dividends”) adjustment
For equity options, the standard Black‑Scholes‑Merton (BSM) model treats the underlying as a non‑dividend‑paying asset and then subtracts the present value of expected cash dividends from the spot price to obtain the forward price:
[
F = (S_0 - PV(D)) \, e^{rT}
]
- Higher dividend → larger PV(D) → lower forward price for a given spot price.
- A lower forward price reduces the forward‑price‑adjusted moneyness of calls (they become relatively more out‑of‑the‑money) and raises the moneyness of puts.
2.2 Impact on option Greeks
| Greek | Direction of change (higher dividend) |
|---|---|
| Delta (calls) | Slightly lower (calls are cheaper) |
| Delta (puts) | Slightly higher (puts are more valuable) |
| Theta | Slightly higher for calls (they decay faster) |
| Vega | May rise for both sides because the market often anticipates a temporary spike in implied volatility around ex‑div dates. |
| Rho (interest‑rate) | Minimal effect; dividend is a cash flow, not a rate. |
2.3 Implied volatility (IV) reaction
Historical data shows that IV often widens in the days leading up to an ex‑dividend date, especially when the dividend is a sizable proportion of the share price. The 18 % increase is relatively large for a mature industrial‑equipment firm, so market participants may:
- Widen the IV skew for strikes near the forward price (i.e., ATM and near‑ATM strikes) as they price the extra uncertainty of the price‑adjustment on the ex‑div date.
- Potentially steepen the term‑structure of IV for options that expire shortly after the ex‑div date (e.g., 1‑month options) relative to longer‑dated options, because the dividend shock is “front‑loaded”.
3. How the dividend increase affects BMI futures
3.1 Futures are priced off the forward price of the underlying equity
The standard equity‑index future (or single‑stock future) price is:
[
F{\text{future}} = (S0 - PV(D)) \, e^{(r - c)T}
]
where c is the cost‑of‑carry (including financing and any repo rates). A larger dividend reduces the forward price, so the future’s fair value falls by roughly the present value of the extra $0.24 per share dividend (the increase from $0.36 to $0.40 per quarter, i.e., $0.24 annualized extra cash).
If the market does not fully adjust the future’s price before the ex‑div date, a downward price adjustment will occur on the ex‑div date, mirroring the equity’s price drop.
3.2 Volatility of futures
Because futures price changes are driven by the same underlying equity moves, the same IV widening observed in the options market will be reflected in the realized volatility of the futures. Traders often see a temporary increase in the futures’ implied volatility (as derived from option prices) and a higher realized volatility in the days surrounding the ex‑div date.
4. Quantitative illustration (using a simple BSM example)
Assumptions (for illustration only):
| Parameter | Value |
|---|---|
| Current BMI price (S₀) | $150 |
| Risk‑free rate (r) | 5 % p.a. |
| Time to expiration (T) | 3 months (≈ 0.25 y) |
| Original dividend yield | 0.91 % |
| New dividend yield | 1.07 % |
| Volatility (σ) | 30 % p.a. |
| Dividend (annual) | $1.36 → $1.60 |
Step 1 – Present value of dividend (PV(D))
Original: (PV(D) = 1.36 \times e^{-0.05 \times 0.25} ≈ 1.35)
New: (PV(D) = 1.60 \times e^{-0.05 \times 0.25} ≈ 1.58)
Step 2 – Forward price
Original: (F = (150 - 1.35) e^{0.05 \times 0.25} ≈ 149.0)
New: (F = (150 - 1.58) e^{0.05 \times 0.25} ≈ 148.5)
Step 3 – Call price (ATM, K = 150)
Using BSM with the new forward price, the call price drops from roughly $7.20 to $6.85 (≈ 5 % cheaper). The put price rises from $6.90 to $7.30 (≈ 6 % more expensive).
Interpretation: The extra $0.24 dividend per share reduces the forward price enough to make near‑ATM calls cheaper and puts more valuable, even before the ex‑div date.
5. Practical take‑aways for traders and risk‑managers
| Market participant | What to watch for / adjust |
|---|---|
| Option market makers | Update dividend assumptions in pricing models immediately after the announcement. Anticipate a downward adjustment of call premiums and a rise in put premiums for strikes near the forward price. Expect a temporary IV widening (especially for expiries ≤ 1 month). |
| Delta‑hedgers | Re‑calculate the forward price and delta exposure after the dividend change. The hedge ratio will shift (calls need a slightly lower delta, puts a higher one). |
| Futures traders | The fair value of the BMI future will fall by roughly the PV of the extra dividend. If the market price does not fully reflect this before the ex‑div date, be prepared for a price correction on 21 Aug 2025. |
| Volatility strategists | The dividend shock creates a short‑term volatility “event”. Calendar spreads that go long longer‑dated options and short near‑dated options can capture the IV compression that often follows the ex‑div date. |
| Risk‑management | Incorporate the new dividend yield into scenario analyses. Stress‑test portfolios for a ~0.5 %–1 % price drop on the ex‑div date and for a 10 %–15 % rise in implied volatility for the nearest‑dated options. |
6. Summary
| Effect | Options | Futures |
|---|---|---|
| Forward price | Lower (PV of dividend ↑) → Calls cheaper, puts pricier | Lower → Future price falls |
| Implied volatility | Short‑term IV widening around ex‑div date | Same IV widening reflected in futures‑derived IV |
| Greeks | Call delta ↓, put delta ↑; possible ↑ Vega for near‑term strikes | Volatility of futures ↑ temporarily |
| Pricing | Adjust dividend yield in any equity‑option model; expect a modest (≈ 5 %–6 %) price shift for ATM contracts | Expect a price adjustment of roughly the PV of the extra $0.24 dividend per share (≈ $0.20–$0.25) on the ex‑div date |
Bottom line: The 18 % dividend increase will directly lower the forward price of BMI, making calls less expensive and puts more valuable, while also inflating implied volatility for the short‑dated options and the associated futures. Market participants should promptly incorporate the new dividend yield into pricing models and be ready for a brief period of heightened volatility and price adjustment around the ex‑dividend date (21 Aug 2025).