Option contract adjustments - Fidelity

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Mutual Funds and Mutual Fund Investing - Fidelity Investments

Clicking a link will open a new window. A 2 for 1 stock split results in twice the number of shares at half the price. The holder of an option contract as a result of a 2 for 1 stock split will now have twice as many option contracts at half the strike price. A 3 for 2 stock split results in an additional .5 shares per 1 share held. The stock price is reduced by 1.5. The holder of an option contract will have the same number of contracts at a reduced (1.5) strike price. The contract will now represent 150 shares per contract. A 3 for 1 stock split results in 3 times the number of shares at 1/3 the price. The holder of an option contract will have 3 times as many contracts at 1/3 the strike price. A 4 for 3 stock split results in 1.33 times the number of shares. The stock price is reduced by 1.33. The holder of an option contract will have the same number of contracts at a reduced (1.33) strike price. The option contract now represents 133 shares per contract. A reverse split results in the reduction of outstanding shares and an increase in the price of the underlying security. The holder of an option contract will have the same number of contracts with an increase in strike price based on the reverse split value. The option contract will now represent a reduced number of shares based on the reverse stock split value. Other examples of stock events that would trigger an option contract adjustment are mergers, acquisitions, and spinoffs. A special cash dividend is outside the typical policy of being paid on a quarterly basis. Assuming a dividend is special, the value of the dividend must be at least $12.50 per option contract and then an adjustment will be made to the contract. A special stock dividend is a dividend payment made in stock versus cash. The holder of an option contract will have the same number of contracts at a reduced strike price. The option contract will now represent the original share value plus the stock dividend. Keep in mind, corporations will use different names for payments of stock or cash to stockholders for a variety of reasons. For instance, calling a payment a dividend versus a distribution or a spin-off can have different tax implications to both the issuing corporation and the stockholder receiving the payment. To an option investor, how the payment is named is not as important as whether contract adjustments are made. When you see an announcement of a special stock dividend, a special cash dividend, a distribution, or a spin-off by a corporation on whose stock you have an option position, be on the alert for contract adjustments.

When do you need to consider exercising options

When underlying corporations make periodic, ordinary dividend payments to their stockholders, contract adjustments are generally not made. In these cases, call option holders must generally exercise their calls and purchase the underlying stock in order to be eligible to receive the payment. When adjustments are made, exercising a call is generally not necessary for eligibility to receive payments such as special dividends, distributions, spin-offs, and the like. These assets generally become "attached" to the call option's adjusted unit of trade, and are distributed through the exercise/assignment settlement process.

Check your contracts

If you suspect that an option contract has been adjusted, you can use to confirm the details. Or go to the OCC website and search by symbol. Now you have a better understanding of how the statement “if it looks too good to be true it probably is” applies to option contract adjustments and events that may impact your option contracts. Know your resources to help identify the adjustments and, as always, you can contact your Fidelity representative for more information.

Next steps to consider

Get new options ideas and up-to-the minute data on options. Use this educational tool to help you learn about a variety of options strategies. Discover an options trading strategy or tool that aligns with your market outlook, no matter your experience level.

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Your e-mail has been sent. Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. Before trading options, please read . Supporting documentation for any claims, if applicable, will be furnished upon request. There are additional costs associated with option strategies that call for multiple purchases and sales of options, such as spreads, straddles, and collars, as compared with a single option trade. Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917 789647.5.0

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