Question

"A customer holds 10 ABC Jan 60 Call contracts. ABC Corporation is paying a 20% stock dividend. On the ex date, the contracts will show as:"

Answer 1

Answer:

On the ex date, the contracts will show as:

10 ABC Jan 60 Calls

The customer must exercise call contracts to buy the stock prior to the Ex-Date

Explanation:

The reason is that if the customer is not exercising the call contracts then it will not be able to receive the stock dividend. Furthermore, the OCC doesn't adjust the contract because of the dividend announcement prior to exercise of contract. This means it will only adjust if the contract is exercised.

The settlement of the exercise takes around 2 business working days, hence the customer must exercise the option 2 days earlier to the ex-date.