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Options
Feb 6, 2017 16:41:01 GMT -5
Post by brucknasty on Feb 6, 2017 16:41:01 GMT -5
If a reverse split would happen, what does that do to current open options?
Say you have some 1.00 Jan 2019 calls. What happens to those if the stock reverse splits 1:10?
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Post by liane on Feb 6, 2017 16:43:25 GMT -5
The options will be adjusted proportionately.
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Post by matt on Feb 7, 2017 10:41:19 GMT -5
If, for example, you had 100 calls at a $1 strike and the stock reverse splits 10:1 then you would have 10 calls with a $10 strike price.
Consider if you owned those 100 calls and the market price was $1.20 at expiration. Your profit would be $1.20-1.00 = 20 cents X 100 calls = $20 profit.
Now, consider if the market price of the stock was $12 post-split. Your profit would be $12.00-10.00 = $2.00 X 10 calls = $20 profit.
This is what is known in the option literature as an "equitable adjustment". Because your profit is $20 in either scenario, you are neither enriched nor impoverished by the split. The math works the other way if there is a forward split; you would get proportionately more options with a proportionately lower strike price.
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Post by scoy on Feb 8, 2017 0:20:00 GMT -5
If, for example, you had 100 calls at a $1 strike and the stock reverse splits 10:1 then you would have 10 calls with a $10 strike price. Consider if you owned those 100 calls and the market price was $1.20 at expiration. Your profit would be $1.20-1.00 = 20 cents X 100 calls = $20 profit. Now, consider if the market price of the stock was $12 post-split. Your profit would be $12.00-10.00 = $2.00 X 10 calls = $20 profit. This is what is known in the option literature as an "equitable adjustment". Because your profit is $20 in either scenario, you are neither enriched nor impoverished by the split. The math works the other way if there is a forward split; you would get proportionately more options with a proportionately lower strike price. Normally that's not the way it's done. The option clearing exchanges don't want to deal with fractional contracts. In the case of a 1 for 10 split: Typically the number of shares of the options contract is adjusted. You'll have 10 contracts that are good for 10 shares each. Sometimes people have complained that it's hard to trade/get quotes afterward.
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Post by scoy on Feb 8, 2017 2:47:21 GMT -5
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Options
Feb 8, 2017 12:14:09 GMT -5
Post by mnkdfann on Feb 8, 2017 12:14:09 GMT -5
www.optionseducation.org/tools/faq/splits_mergers_spinoffs_bankruptcies.html"How are options contracts adjusted for reverse stock splits?" "Typically, a 1-for-20 reverse split causes the option contract to be adjusted by changing the deliverable to 5 shares of the new stock. You can expect the contract multiplier to remain 100, and of course, a modified option symbol to reflect a change in the deliverable securities." (The Options Industry Council (OIC) ... was formed in 1992. Today, its sponsors include BATS Options, BOX Options Exchange, Chicago Board Options Exchange, C2 Options Exchange, International Securities Exchange, ISE Gemini, MIAX Options, NASDAQ OMX BX Options, NASDAQ OMX PHLX, NASDAQ Options Market, NYSE Amex Options, NYSE Arca Options and The Options Clearing Corporation (OCC). OIC's Roundtable is the independent governing body of the Council and is comprised of representatives from the exchanges, member brokerage firms and OCC.)
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