My question can be summarised as such:
- Consider a portfolio. Say it has a price $\Pi = x$.
- Portfolio consists of a stock and a sequence of call options underlying on the stock.
- It has been announced that a dividend will be paid in half year. However, assume that the stock price does not change today.
- How will the value of the portfolio change today?
- If the stock price does not change today due to announcement, then we can assume the dividend is already priced into the stock value.
- In order to use the Black-Scholes-Merton option pricing model, the underlying stock price must only consist of a risky component, and not the certain dividend component as it must be assumed that stock prices follow a geometric Brownian motion.
- Since the stock price used for the model decreases (subtracting the present value of the dividend in half year), and the delta of the portfolio is positive, the value of the portfolio must decrease.
Where is the flaw in my argument (if there is one) ?