Minyan Mailbag - Microsoft Options
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.
Do you think you or one of the professors could discuss how MSFT options will be affected by the special one time dividend? Will they create new options? Will the strike price decrease on the ex date?
Ultimately it is the OCC (option clearing corp) who decides how to treat "special dividends" (normally considered anything over 10% and which is not regularly paid), but the precedent is clear and there have been no deviations from this that I am aware of. The precedent is that the option holder is not penalized for a special dividend. This is accomplished by adjusting any existing options outstanding for the dividend.
For example, in the case of MSFT all options strikes will include the $3 dividend upon exercise. A holder of a call option when they exercise will receive the stock at the strike price plus $3 in cash, delivered by the seller of the call; the holder of a put will deliver the stock at the strike price plus $3 in cash to the seller of the put.
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