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A trader has a call option contract to sell 100 shares of a stock for a...

A trader has a call option contract to sell 100 shares of a stock for a strike price of $50. What is the effect on the terms of the contract of the following events?

(a) A $5 dividend being paid

(b) A 5-for-4 stock split

(c) A 10% stock dividend being paid.

Solutions

Expert Solution

A. cash dividend is always adjusted from the strike price so strike price will be deducted by the cash dividend and new strike price will be $45. (50-5)

B. In case of a stock split the number of stocks will be higher for the individual and the overall number of stock will increase to 125 (100*5/4) and the strike price will be coming down in order to adjust for increase in number of stroke and new strike price $40 (50*4/5)

C. in case of stock dividend, overall number of shares will be increasing and the stock price will be decreasing so the number of a stock will be 110 (100*11/10) and the strike price will be declining for adjustment in increase in the number of stocks . The new strike price will be 45.4545(50*10/11).

jeff jeffy answered 2 years ago
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