There are various types of corporate actions that can affect your options position. Corporate actions or activities that may cause an option to be adjusted include stock splits, mergers, acquisitions, special dividends, spin-offs, and reverse splits. After a significant corporate action, options are often adjusted to ensure that the overall equity or obligation of an option contract remains intact. The following may change:
- Strike price
- Deliverable (initially 100 shares and no cash)
- Multiplier (initially 100)
Stock splits can affect strike price, deliverable, and the number of contracts.
- 2 for 1: Twice as many contracts with a strike price = ½ the original strike price.
- 3 for 1: Three times as many contracts with a strike price = ⅓the original strike price.
- 3 for 2: The same quantity of contracts, a strike price = ⅔ the original strike price (to the nearest penny), and the multiplier is changed from 100 to 150.
- 1 for 5: Reverse split. No change to strike price or multiplier; however, the deliverable becomes 20 shares.
Mergers typically impact the deliverable, but not the strike price or number of contracts.
- ABC company does a takeover of XYZ company. There are 1.72 shares of ABC for every share of XYZ. No adjustment is made to the number of contracts, the strike price, or the multiplier. However, the deliverable is changed to 172 shares of ABC.
Spin-offs are similar to mergers.
DEF spins off UVW. No adjustment is made to the number of contracts, the strike price, or the multiplier. The deliverable is now 100 DEF plus "x" shares of UVW.
Special dividends may impact strike price.
IOU is trading at $100 and authorizes an $8 dividend. Strike prices are adjusted down by $8 on the ex-date.
Ticker Changes impact the symbol, but not the strike price or number of contracts.
If the underlying stock for an options contract you own executes a ticker change, the ticker on the options contract will change to reflect the new ticker on the underlying stock.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Options Disclosure Document. Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.