What happens to options if a stock split is announced?

  • Posted: 27 January 2012 02:50 AM

    Sorry for a NOOB question,

    I have some long term call options (Jan 13) and I am wondering what happens to those options which have strike prices ranging from 420 through 525 if Apple announces a stock split before expiration date?

    Do the number of options I am holding automatically double while their individual value halves, and is this taken care of by the market makers (Fidelity) from whom I purchased the options?

         
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    Posted: 27 January 2012 02:57 AM #1

    That’s pretty simple.  You get 2x the options at half the strike price.  Value is adjusted accordingly.  The only thing that changes, in theory, is the amount of commissions you have to pay due to the higher number of contracts if you sell the day after the adjustment.

    As for _who_ takes care of it (the options exchange, a clearinghouse, whoever), I’m not sure.

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    Posted: 27 January 2012 03:13 AM #2

    If the split were 2:1, then the strike price is halved. Right now we have options in $5 intervals, so existing options would trade in $2.50 intervals.

    But what about new options? Would they be offered in $5 intervals or $2.50 intervals? This would first be answered in weeklies, but would show up when new monthlies and LEAPS list, too.

    Why does the interval matter? A $5 interval would be a larger percentage of the stock price at $220 than at $440. The higher AAPL goes, the tighter the percentage between strike prices. There does seem to be some correlation between the price range of AAPL and the highest open interest options.

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    Posted: 27 January 2012 05:23 AM #3

    Mav - 27 January 2012 06:57 AM

    That’s pretty simple.  You get 2x the options at half the strike price.  Value is adjusted accordingly.  The only thing that changes, in theory, is the amount of commissions you have to pay due to the higher number of contracts if you sell the day after the adjustment.

    As for _who_ takes care of it (the options exchange, a clearinghouse, whoever), I’m not sure.

    No, the number of options and the strike price remain the same. What changes is the number shares each option contract is worth.

    If Apple splits 2:1, all options already issued will have the strike price unchanged, but upon expiration each contract will give you 200 Apple shares instead of the usual 100.

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    Posted: 27 January 2012 06:15 AM #4

    Interesting.  Maybe the answer is “it depends”?

    Because I had this happen to me during the Great AAPL Stock Split of 2005.  I held calls and I actually did get double the options at half the value and half the strike price.

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    Posted: 27 January 2012 07:13 AM #5

    Mav - 27 January 2012 10:15 AM

    Interesting.  Maybe the answer is “it depends”?

    Because I had this happen to me during the Great AAPL Stock Split of 2005.  I held calls and I actually did get double the options at half the value and half the strike price.

    uhmmm…...

    Maybe it does depend.

    Some Citibank options I hold in my E*Trade account didn’t change strike price nor value when Citibank a did the 1:10 reverse split. I expected the options to be reduced by 10 and the strike price to increase from $5 to $50. What happened instead is that each option now entitles me to 10 Citibank shares instead of the usual 100.

    I regret that purchase.

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    Posted: 27 January 2012 10:40 AM #6

    awcabot - 27 January 2012 09:23 AM
    Mav - 27 January 2012 06:57 AM

    That’s pretty simple.  You get 2x the options at half the strike price.  Value is adjusted accordingly.  The only thing that changes, in theory, is the amount of commissions you have to pay due to the higher number of contracts if you sell the day after the adjustment.

    As for _who_ takes care of it (the options exchange, a clearinghouse, whoever), I’m not sure.

    No, the number of options and the strike price remain the same. What changes is the number shares each option contract is worth.

    If Apple splits 2:1, all options already issued will have the strike price unchanged, but upon expiration each contract will give you 200 Apple shares instead of the usual 100.

    In my experience during tech bubble days we got twice the implied shares at half the price, as I recall.

    [ Edited: 27 January 2012 10:44 AM by Red Shirted Ensign ]

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    Posted: 27 January 2012 12:31 PM #7

    awcabot - 27 January 2012 11:13 AM
    Mav - 27 January 2012 10:15 AM

    Interesting.  Maybe the answer is “it depends”?

    Because I had this happen to me during the Great AAPL Stock Split of 2005.  I held calls and I actually did get double the options at half the value and half the strike price.

    uhmmm…...

    Maybe it does depend.

    Some Citibank options I hold in my E*Trade account didn’t change strike price nor value when Citibank a did the 1:10 reverse split. I expected the options to be reduced by 10 and the strike price to increase from $5 to $50. What happened instead is that each option now entitles me to 10 Citibank shares instead of the usual 100.

    I regret that purchase.

    The strike price and the number of shares per contract both change with a split. With a 1:10 reverse split, each contract is supposed to go from 100 shares down to 10 shares, so that part sounds fine. But it sounds like you’re saying that the strike price was $5, and, instead of going up to $50, it remains at $5. That would mean that what should have been OTM calls now would be deeply ITM, which would be an unfair benefit to the call holder.

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    Posted: 27 January 2012 03:31 PM #8

    That’s why.

    Think about if you have one contract during a reverse split.  There’s no way an option holder can end up with 1/10 of a contract.  When you do the normal, everything’s fine stock split wink like a 2-for-1. it’s trivial to double the contract and halve the strike price.

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  • Posted: 14 February 2012 02:01 AM #9

    Number of shares for open contracts adjusted. New ticker symbols added for 100-new-share contracts. Two market prices listed at each strike. (one for 100 share contract ticker,one for old n00 share contract ticker) I think. I also think sometimes your online broker may automatically replace old contracts with equivalent new for you, since there is no disadvantage.

    [ Edited: 14 February 2012 05:07 AM by sleepygeek ]