Hi all,w'll be glad if anyone can help me find an answer.recently i had some confusion calculating the drop in the price of american deep itm calls (early exercise candidates) after the first ex dividend date if the there are more than 1 dividend during the life of option. i thought the drop should be :expected drop = [currrent dividend + PV ( future dividends)]- [time value (corresponding put price) + interest on strike]but this doesn't seem to work in real markets.here is a example of a stock Ahold NV which went ex div on 19th april . the stock was trading at 11.675 a day before ex div date (19th april). It pays one dividend every year in april. The dividend schedule is 19th april 2013 : 0.44 , 22nd april 2014 : 0.41On 18th april ,One day before the ex date ,the dec14 9.6 call was trading at 2.075 and corresponding put was trading at 0.56. And on the ex date (19th april) ;stock dropped to 11.235 ( drop by 0.44 , the div amount)dec14 9.6 call was priced at 1.989 ( drop by 0.086) . [ vol and all other parameters unchanged , just ex div affect]however, i had expected the price of dec14 9.6 call to drop by 0.23 .here is my calculation:curr div + pv (future divs) = 0.44 + 0.41/exp(0.0035*1)=0.85 (assuming interest rate of 0.35%)put price = 0.56 interest =9.6*(1-exp(-0.0035*(609/365))) =0.056so, drop in price of call = 0.85-0.56-0.056 = 0.23 so , where i had expected a drop of 0.23 in the 9.6 call it only dropped by 0.086 after the first ex div date.I will be glad if anyone can explain this or throw some light on this event. i would like to point that dec14 9.6 call was an early exercise candidate and 90% of it got exercised , all the parameters has been kept same to analyze only the ex div affect.thanx neo

let me re frame the question i m trying to answer:what should be the drop in price of an american ITM call (delta 100) expiring at T after the first ex -dividend date t1 if there are multiple dividends d1,d2,d3 ..dn at dates t1, t2,t3..tn during the life of option.

then am i right in thinking that the price drop can be anything but definitely their will be range in which it will lie.lower bound = interest on strike ( once you exercise u will have to pay K , so u definitely loose that)upper bound = dividend ( it can't drop more than the current dividend amount )so, interest on strike <= price drop <= dividend amountcorrect me if i am thinking wrong.

interest on the strike:you will have to pay K to buy the stock which is worth S when you exercise,you could have earned interest on this amount if you have chosen not to exercise. so this is what you loose apart from time value and dividend is what you get.so, the inequality , exercise at t1 only if D > k[1-exp(r*(t1-t))] normally i have seen for short term options if there are no more dividends during life of options the call price drop on ex div date by (dividend-put price - interest) and that kind of make sense as well, difference of what you gain and what you loose on exercising. i was in doubt about the multiple dividend case for long term option like 2y ,3yr. for example, say i am looking at dec14 options , stock went ex div now by d1, but their are more dividends left during life of option, then how the above calculation will work? early exercise criteria and the price drop ?