Question

1. A stock is going to go ex-dividend prior to the option expiration date. Prior to expiration, are you more likely to

1. Exercise an American Put prior to the ex-date
2. Exercise a European Call prior the ex-date
3. Exercise an American Call prior the ex-date
4. Exercise a European Call after the ex-date
5. Exercise an American Call after the ex-date

Answer 1

The correct answer is option c. Exercise an American Call prior the ex-date

If we exercise an American Call prior the ex-date, we are eligible for the stock dividends.

We cannot exercise a European option prior to the expiry date, so options b and d are incorrect.

Option a is incorrect because exercising an American Put option means we are getting rid of our stock, which is expected to pay dividends. This is not desirable.

Option e is incorrect because we exercise an American Call before the ex-date, not after the ex-date.

Can you please upvote? Thank You :-)