The dividends expected during the life of the option. The payment of dividends on the underlying stock detracts from an option's value. This is because the option holder does not receive the dividends. This is also because the company pays out retained earnings that otherwise might be available for reinvestment and would contribute to the growth in value of the underlying stock. Call options are more valuable when expected dividends are zero or small.
Put options are more valuable when dividends increase in size.
To value marketable stock options, most of the valuation models incorporate time to expiration date, the risk-free interest rate during the period, estimated dividends, stock price volatility, and a probability distribution of ending share prices. The most famous stock option valuation formula is the Black-Scholes option pricing model. In 1973, Fisher Black and Myron Scholes derived what remains as the most widely used and best known theoretical model for the valuation of marketable options. The model is based on the assumption that it is possible to set up a perfectly hedged position consisting of owning the shares of stock and selling a call option on the stock. Any movement in the price of the underlying stock will be offset by an opposite movement in the option's value, resulting in no risk to the investor.