Stock Option Splits

When stocks split, their put and call options are adjusted. This is important because options investors need to be made "whole" when a stock split occurs. This is according to rules that have been put in place by the Options Clearing Corporation, or OCC. These rules are important in order to maintain a stable and dependable market with stable options. The options holders should not be left to their own devices when a company makes the decision to split.

Any time that stock dividends reach 10% or more, they have to split and these splits result in options being adjusted. If a split occurs anyway and the dividends are not over 10%, then no adjustments will be made.

If you see a notation that says there is a split of 2:1, this means that for every one share a shareholder has, they now have two. A stock may even split into triplicates. If you see that notation, then you know how it is your stocks split.

Adjusted Options

There is a difference between a split and an adjusted option that is very important to consider when going through stock option ordering. For instance, in the split you are not going to get the full value of the stock. You are going to get an adjusted value that reflects what you actually have invested. If you are dealing with a 2:1, then the shares are worth half their value. The good news, however, is that you have that many more shares to earn on.

It is not unusual for stocks to split. Sometimes when they exceed $100, they will split because companies like to keep them under $100. This helps stocks to be more affordable for investors and this benefits the company and the economy. Although the stock split won't benefit new buyers, existing ones end up with more shares. And what happens on the market is the number of shares the company once had suddenly doubled and the price per share is half of what it was as a whole.

An adjustment is not a negative thing. Yes, it would be nice to keep the stock value even after a split, but then this would mean chaos because that is money that doesn't exist going into the pockets of investors. It is simply easier to split the stock than to have a stock that is so high priced no one will want to invest in it.

Splitting

Here is an example of splitting: A stock reaches a price of $100. Because of this, the stock splits into two separate shares that are worth $50 each. The existing shareholders didn't lose any money. Instead, they can gain on two shares instead of one. The company didn't lose anything because they now have twice the shares they had before, so the value is exactly the same.

But when a stock splits, this is where investors need to be careful. What happens is many investors want to jump on the opportunity to buy a stock that was once $100 for $50. Because of this, the stock value may soar. For the options investor, soaring stock prices can be a negative experience since the options investor may call their options to take a short position and beat the stock. If an investor puts a strike price of $51 on their new $50 stock and it soars to $55, the $51 price is locked and that means a loss.

So although stock option splits can be a good thing, it can be a difficult road for the options investor. Nevertheless, your financial advisor can help you in making the right decisions when this happens so that you can win and not lose.

We can help you find a financial advisor

Compare multiple financial advisors who will meet your specific investment goals.