Special Dividends - the Exception to the Rule.
As an options traders we need to consider the expected dividends in the time frame until expiration date. This is because the stock price goes down after the Ex-date by the amount of the cash dividend. A stock holder get paid that dividend so he is not influenced by that. However, a Call option holder, may want to exercise the option before the Ex-date if the option is in the money and there is not enough time value and the dividend is big. If he decide to hold the option past the Ex-date, the price of the stock will be lower, thus reduce the Call option value.
Because traders have expectation about the regular dividend amounts for each company, they can add this input to the option pricing model.
However, when there is a Special Dividend that is not expected, in order to avoid transfer of wealth from the Call options buyers to the sellers, an adjustment must be made.
If the dividend amount exceeds 12.5$ per contract, then there is going to be an adjustment to the strike price which will be reduced by the dividend amount.
Here is an example of such adjustment in DVN:
Holding 20 Call 11 before Ex-date.
Holding 20 Call 10.74 after 0.26 special cash dividend.
And here is the announcement from the OCC site:
So, when you see an announcement of a special stock dividend, be alert for strike adjustments. You can go to OCC website to check the dividend announcement.