Anticipated by the market and the stock was unchanged

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Reference no: EM131848644

Today is Mar 2, 2016. You own a call option for 600 shares of GE, for which you paid $1.25/share. Your strike price is $30/share. The option expires on May 20, 2016. GE currently trades at $30.37/share. GE pays a quarterly dividend of $.23/share. The most recent ex-dividend date was Feb 25, 2016. The next ex-dividend date is May 25, 2016.

A. Let’s say that GE decided today to boost its dividend to $.50/share starting with its next dividend. It is likely that there would be some impact on the stock, but let’s say this was anticipated by the market and the stock was unchanged. Will this dividend change affect your option, and why?

B. Let’s say that, instead of a dividend increase, GE decides its stock price is too low. (They are envious of Apple’s $90 price.) GE decides to immediately do a 1-for-3 reverse stock split. (Mathematically, this is identical to a regular split except that instead of more shares, you get less.) What would the new GE stock price be, approximately? How would your option be affected? That is, would the strike price and/or number of shares change, and by how much? (see Chapter 9 or the powerpoint for the formula)

Reference no: EM131848644

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