Adjusted Exercise Price
Contents
Deciphering the Adjusted Exercise Price: Understanding Options Contract Adjustments
Unveiling the Adjusted Exercise Price
The adjusted exercise price is a critical aspect of options trading, ensuring that option holders are not disadvantaged by corporate actions such as stock splits or special dividends. When changes occur to the securities underlying options contracts, adjustments are made to strike prices and delivery quantities to maintain fairness for both long and short option holders.
Navigating Adjustments
Options contracts undergo adjustments when the underlying stock experiences reorganizations like stock splits or dividends. For instance, a two-for-one stock split doubles the number of shares at half the price, prompting a corresponding adjustment in option contracts. While fractional strike prices may result from adjustments, they only impact existing options series, with new strike prices added post-adjustment.
Illustrative Examples
Consider a 3:1 stock split, where outstanding shares triple at a third of their original price. Options strike prices must adjust accordingly, potentially leading to decimal strike prices. Conversely, a reverse stock split reduces outstanding shares while increasing stock price, necessitating adjustments to strike prices in options contracts.
Special Considerations
Extraordinary cash dividends exceeding $12.50 per contract may prompt reductions in strike prices, while stock dividends result in proportional reductions based on dividend value. Notably, strike prices remain unaffected by ordinary dividends, ticker symbol changes, or mergers and acquisitions.