An investor friend has asked me some questions about the selling of put options. His questions are in bold italics.
When you sell puts, do you have to cover the dividend distribution for the buyer? No. You don’t own the stock. You have sold an obligation to buy the stock at the strike price –at a random buyer’s discretion–the contracts are fungible, so assignment is an entirely random process (especially early assignment, which is very rare). The dividend belongs to those who have open contracts on the other end (they bought the put as an insurance and they are holding the underlying). If I am assigned the stock before the ex-dividend date the dividend is mine. If it is after, the dividend belongs to the buyer of the put. Regular dividends are calculated into the price of the premium, according to the experts. But extraordinary dividends are considered part of the strike price (i.e., a $3 dividend for Microsoft, would mean that on the day of expiry if Microsoft was $25 and the strike price was 29, the $3 extraordinary dividend would be added to the 25 and the contract would expire in the money. If assigned, the buyer would relinquish 100 shares and $300.