Question

Consider an exchange-traded put option contract to sell 500 shares with a strike price of $40 and maturity in four months. Explain how the terms of the option contract change when there is
a) A 10% stock dividend
b) A 10% cash dividend
c) A 4-for-1 stock split

Answer 1

a)
If there is 10% stock dividend then the number of shares under the contract would increase and the strike price would reduce.
Number of shares under contract = 500*1.1	550.00
The strike price would be = 40/1.1	$36.36
b) The cash dividend does not impact the put option contract and so no adjustment is made for cash dividend.
c)
If there is 4 for 1 stock split then the number of shares under the contract would increase and the strike price would reduce
Number of shares under contract = 500*4	2000
Strike price would be (40/4)	$10.00