Final answer:
Declaring or paying dividends does not immediately affect a put option contract, but the underlying stock price might drop by the dividend amount, potentially increasing the option's value. A 5-for-2 stock split would adjust the number of covered shares and the strike price. A 5% stock dividend increases the number of shares and adjusts the strike price in the contract terms.
Step-by-step explanation:
Impact of Dividends and Stock Splits on Put Options
When we consider the effect of dividends and stock splits on the terms of a put option contract, several things must be taken into account, such as the adjustment of strike price and the number of shares represented by the option.
(a) A $2 Dividend Being Declared
When a $2 dividend is declared, there is generally no immediate effect on the put option contract. However, the ex-dividend date, which usually follows the declaration, will have an impact because the stock price typically drops by the amount of the dividend as the market anticipates the payout.
(b) A $2 Dividend Being Paid
When a $2 dividend is paid, the stock price may decrease by the dividend amount on the ex-dividend date. This decrease can potentially increase the value of the put option, as the underlying stock price is lower relative to the strike price.
(c) A 5-for-2 Stock Split
In the event of a 5-for-2 stock split, the number of shares the put option covers would be adjusted proportionally. If the trader has a put option on 100 shares, after the stock split, they would have a put option on 250 shares ($60 strike price adjusted to $24) to maintain the same value.
(d) A 5% Stock Dividend Being Paid
If a 5% stock dividend is paid, for every 100 shares owned, an investor gets 5 additional shares. Similarly, the terms of a put option contract would be adjusted such that both the strike price and the number of shares represented by the option would be increased accordingly.