Suppose I hold a call option with strike price of $50. Suppose the company decides to issue an extraordinary dividend of $20 per share. What's going to happen to the option I own?
I'm guessing that one of these scenarios will happen:
(a) The derivatives exchange will reduce the option strike price by $20 (i.e. the strike price now becomes $30).
(b) The derivatives exchange will not change the option strike price. Instead the derivatives exchange decrees that when I exercise the option (remember, strike price: $50), I will receive the dividend amount ($20).
What is going to actually happen to the options when a large extraordinary dividend is declared?