0
$\begingroup$

suppose i say lyft in 2023 will be worth more then 50 per share (the current call price for the option). suppose im right and each share is worth 75, but in the interim lyft announces a 2-1 stock split and is now worth 37.50 per share. does the call price coordinate with the stock split, and become 25? or is part of the risk of buying options that the stock may split and youre left with a way overvalued option?

$\endgroup$
2
  • 2
    $\begingroup$ Your standardized option contract says that both that the amount of shares and the strike (price per share) get adjusted for stock splits (and reverse stock splits and stock dividends). One fewer risk to worry about. $\endgroup$ Aug 3 at 14:05
  • 1
    $\begingroup$ It's worth mentioning that the adjustment methodology is likely to differ slightly across exchanges. $\endgroup$ Aug 3 at 22:28
3
$\begingroup$

Yes. The Options Clearing Corp handles this in a way that you would expect.

2 for 1 splits are easy: strike prices are halved and you get 2 for every 1 that you had before. Then everything continues trading as before.

Non-standard splits, mergers, and other share dividends become more complex. On a 3 for 2, split, the share count is changed, the strikes are changed, and then you are left with non-standard options. All the economics are fine, but the problem is that all new standard options are then listed with the 100 share deliverable. It means that the new options take all the liquidity and your "old" options are kinda orphaned. To reiterate: that is not the case for a 2 for 1.

hth

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.