Option pricing models, such as the Black Scholes model, almost always assume the stock will not pay any dividends. But, many companies do indeed pay dividends, so we need to understand how the presence of these dividend payments will impact option prices. Fortunately, both the Black Scholes model and Put-Call Parity model have extended versions that account for the possibility of dividends.
What we learn from these models is that an upcoming dividend payment will reduce the time value (also known as extrinsic value) of a call option and boost the time value of a put option. This can be argued from a supply/demand standpoint, where more people would prefer to hold the stock over the call option to collect the dividend, and the put option is more attractive than shorting the stock to avoid having to pay the dividend on the short position. This can also be argued from an arbitrage standpoint, where the underlying stock will fall by the amount of the dividend (at least in theory) on the ex-dividend date. Thus, had the options not been pricing in this inevitability, selling a call or buying a put prior to the ex-dividend date would yield a riskless profit.
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