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This is a level 1 question.
In a 3-for-2 stock split, does the 100 strike become the 75 strike?
Let's begin by explaining what a stock split is and what it does to an equity. A stock split increases the number of shares. After a 3-for-2 split, you'll have 3 shares for every 2 that you currently own. Generally, one of the reasons why a company splits its stock is to make it more attractive for investors to purchase. It is purely a psychological phenomenon in which people like to buy a company at a bargain or discount from its former higher levels. In addition, there is some thought that it broadens the shareholder base, thus making the stock more liquid and appealing. This is because potentially smaller shareholders now can afford the shares at the reduced price.
So how does a 3-for-2 stock split impact an options investor? Let's say an investor bought an XYZ Corp. 60 call or a put and XYZ subsequently effected a 3-for-2 stock split. Instead of covering 100 shares of stock at an exercise price of $60 a share, each outstanding option could be adjusted to cover 150 shares at an exercise price of $40 per share. To answer your question, the 100 strike would probably become the 66.625 strike, with each contract worth 150 shares.
When a stock distribution results in the issuance of one or more whole shares of stock for each outstanding share, such as a two-for-one stock split, as a general rule the number of underlying shares is generally not adjusted. Instead, the number of outstanding options is proportionately increased and the exercise price is proportionately decreased. Thus, a 100-strike option would become two 50-strike options after a 2-for-1 split.
It's always best to check with your broker about the rules governing a particular split. Also, you can check the exchange listing the option for information on the post-split strikes.
Thanks for your question, and good luck with your trading.
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Question Level Key
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of Options, Option Pricing Models, and Nuances of Trading. Included could be a variety of
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