Question

A trader has a call option contract to buy 100 shares of a stock for a strike price of $40. What is the effect on the terms of the contract of:
a) A $1 dividend being declared b) A $1 dividend being paid c) A 10-for-3 stock split d) A 15% stock dividend being paid

Answer 1

A) when the dividend is declared the price of call option will discount the effect of dividend on stock price and till ex dividend date call price will go down gradually to accomodate impact of dividend on stock price. Hence it will adjust the impact of $1 till the time of record date.

B) $1 dividend impact on call price will be discounted weeks before actual dividend is paid.

C) Call price adjusts itself for the splits.

D) 15% dividend pay gets adjusted in call price starting from the date of dividend declaration to the ex date.