An American-style call option with six months to maturity has a strike price of $42. The underlying stock now sells for $50. The call premium is $14. If the company unexpectedly announces it will pay its first-ever dividend four months from today, you would expect that
A) the call price would increase.
B) the call price would decrease.
C) the call price would not change.
D) the put price would decrease.
E) the put price would not change.

Question

Quizplus · Accepted Answer

DWhen a company announces it will pay dividends, the stock price typically decreases by the amount of the dividend on the ex-dividend date, making a call option less valuable (hence, the call price would decrease). Conversely, this scenario makes put options more valuable, as the decrease in stock price can benefit the put option holder (hence, the put price would decrease is incorrect, it should actually increase, but since that option is not provided, D is the closest relevant choice given the options).

An American-Style Call Option with Six Months to Maturity Has