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If a 5% stock dividend is declared, the owner of 1 XYZ Jul 30 call owns A) two contracts for 100 shares with an exercise price of 30. B) one contract for 105 shares with an effective exercise price of $28.57. C) one contract for 100 shares with an exercise price of 30. D) two contracts for 105 shares with an exercise price of 30

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Tundexi

In this case, the owner of 1 XYZ Jul 30 call owns one contract for 105 shares with an effective exercise price of $28.57.

What is the stock dividend?

When a company pays a stock dividend or effects a fractional stock split, the underlying option is adjusted by increasing the number of shares the contract covers.

Hence, 5% × 100 shares = 5 additional shares).

Number of contracts owned remains same and the effective exercise price will be adjusted so that the position value before and after the adjustment remains the same

= $3000 / 105

= $28.57.

Hence, the owner of 1 XYZ Jul 30 call owns one contract for 105 shares with an effective exercise price of $28.57.

Therefore, the Option B is correct.

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