Options Adjustments for Stock Splits and Stock Dividends
An investor owns 1 XYZ 60 Call contract (representing 100 shares). XYZ executes a 2-for-1 forward stock split. How will the Options Clearing Corporation (OCC) adjust the contract?
For standard whole stock splits (e.g. 2-for-1 or 3-for-1), the OCC creates MORE contracts: Contract number is multiplied by the split ratio (1 × 2 = 2 contracts), strike price is divided by the split ratio ($60 ÷ 2 = $30), and shares per contract remain 100.
Complete Analysis & Legal Rationale
For fractional splits (e.g. 3-for-2) or stock dividends, the number of contracts remains 1, the strike decreases, and the shares per contract increase to 150.
Mathematical Step-by-Step Derivation
- Step 1: Split Ratio = 2-for-1 (multiplier = 2).
- Step 2: New Number of Contracts = 1 × 2 = 2 contracts.
- Step 3: New Strike Price = $60 ÷ 2 = $30.00.
- Step 4: Shares per Contract = 100 shares.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
2 contracts @ $30 strike, each covering 100 shares.
Adjusting shares to 200 on 1 contract occurs for fractional splits/stock dividends, not whole splits.
Describes a reverse stock split (1-for-2).
Options are adjusted by the OCC; they do not expire.
Official Standard: Specifies adjustment mechanisms for whole splits vs fractional dividends.