An investor has one exchange-traded put option as follows: Exchange-traded put o

Question

An investor has one exchange-traded put option as follows:

Exchange-traded put options         

Number of shares in the put

Price per share  

Cash dividend per share

Which of the following is then the position of the investor? (Explain)

a. The investor has a put option to sell 100 shares for $19,500.

b. The investor has a put option to sell 100 shares for $20,000.

c. The investor has a put option to sell 105 shares for $19,500.

d. The investor has a put option to sell 105 shares for $20,000.

Exchange-traded put options         

Number of shares in the put

Price per share  

Cash dividend per share

Explanation / Answer

The answer to the question is option (a).

The exchange automatically drops the price of the share by the amount of the dividend on ex-dividend date. Thus a put option becomes more expensive. In other words the invester of the put option has to sell the shares for a reduced amount.

In the given scenario, the share is priced @ $200. Since the dividend is $5, the exchange drops the price of the share to $195. The investor thus has a put option to sell 100 shares for $19500 instead of $20000.

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