Question

1. A trader has a put option contract to sell 100 shares of a stock for a strike price of $60. What is the effect on the terms of the contract of (a) A $2 dividend being declared (b) A $2 dividend being paid (c) A 5-for-2 stock split (d) A 5% stock dividend being paid.

Answer 1

a)No effect. because, when a business discloses a cash dividend later on the ex-dividend day the price of dividend is to decrease of the strike price to options. the cash dividend is not needed to be changed for exchange-traded options.

b) when the business reports cash dividends then it would appear in a decrease in the stock price with the price of dividend at the ex-dividend date. The owner of the options would not modify the declines in stock prices. the decline in stock prices will boost the amount of the put option.

hence, The terms of the contract are not usually modified for a cash dividend. hence, there will be no effect in the terms of the contract where the dividend is paid $2.

c)There is a 5 for 2 stock splits. the strike price is $60. the terms of the contract are to be settled in status to explain the decline in stock price. and a rise in the number of stocks. the a and b depicts decline in the stock price to a/b of its preceding value. There is the jump in shares to b/a to its former value. there is the effect in terms of the contract due to the stock split.

The option contract converts the unit to sell increased to 250 shares (100*5 /2) with a strike price decreased to $ 24 per share ($60*2/5).

d) In the question,

the strike price = $60*20/21

= $57.14

number of shares = 100* 21/20

= 105 shares

the terms of the contract require to be changed for stock dividends. stock dividends effect in a reduction in stock price and rise in the number of shares. The terms of options contract modified so that it presents the holder the right sell 105 shares and a strike price of $ 57.14 per share. So, there will be an effect