General Securities Representative (Series 7) Practice Exam

Exercising an option before the ex-dividend date entitles which party to the dividend?

1. The seller of a call

2. The buyer of a call

3. The seller of a put

4. Neither party

The correct answer is: The buyer of a call

Exercising an option before the ex-dividend date indeed entitles the buyer of a call option to receive the dividend payment. When an investor buys a call option on a stock, they acquire the right to purchase the underlying stock at the specified strike price. If they choose to exercise this option before the ex-dividend date, they will acquire the shares of stock and thus be eligible to receive the upcoming dividend payment. Dividends are typically paid to shareholders who hold the stock on the record date, which falls shortly after the ex-dividend date. Therefore, it is critical for the buyer of the call option to exercise it before this date to ensure that they have ownership of the stock and can receive the dividend. In contrast, the seller of a call option does not receive the dividend because they do not hold the underlying stock. The seller has sold the call option and does not benefit from ownership of the shares. Similarly, the seller of a put option is also not entitled to receive the dividend as they are not in possession of the stock; their position is based on the obligation to buy the stock at the strike price if the buyer chooses to exercise the option. The option seller remains a separate entity from the stockholder entitled to dividends, which