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I'm attaching stock prices from CRSP to a dataset of option prices in order to compute the option moneyness.

I'm wondering whether I should adjust the underlying prices taking into account splits and dividend payments?

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  • $\begingroup$ If you do that, you'll have to adjust strike prices as well. What are you trying to find in/from the data? $\endgroup$
    – user59
    Oct 19, 2014 at 18:15

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It depends whether the underlying prices you have are raw (unadjusted) or already adjusted.

Splits and dividends are two different cases:

  1. When dividend is paid the stock price drops by the dividend amount, but strike prices are not changed.

  2. When there is a split (or any other corporate action like capital restructure, spin off), new option series are issued with adjusted strikes. In that case the strikes should correspond to the new (post-split) underlying price.

For example:

Shares of ABC were traded at 100 per share. Strikes were 80, 90, 100, 110, 120. Split occurs with ration 1:2. The day after the split, a share of ABC is 50, and new adjusted strikes are issued: 40, 45, 50, 55 and 60.

It's important to remember, that old strikes are being listed for a while after the strike, but these options become "special" and should not be included in the analysis.

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