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? $\endgroup$– user59Oct 19, 2014 at 18:15
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1 Answer
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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:
When dividend is paid the stock price drops by the dividend amount, but strike prices are not changed.
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.
