Unsure about the effects of corporate actions on your options? Continue reading for a few practical real-world examples of adjusted options after popular types of corporate actions.
Stock Split (Forward Split)
A forward split is used by a company to increase the number of shares that are outstanding. Shareholders are given more shares, but there is no change to the total value of their shares.
Long/short option holders may see the number of contracts they own multiplied by the same ratio as shareholders. For example, with a 3:1 stock split, the number of option contracts is multiplied by 3, and the strike price is divided by 3.
Example: You hold an XYZ $90 Call trading for $6 - after the 3:1 split you will hold 3 XYZ $30 Calls worth approximately $2 each.
Reverse Split (Consolidation)
A consolidation is used by a company to reduce the number of shares outstanding. Shareholders will be given a reduced number of shares but each share will now be worth more.
Long/short option holders may see that the number of shares represented by each contract will change according to the same ratio as shareholders. For example, with a 1:2 consolidation instead of 100 shares per option contract as the deliverable, it would
typically be 50 shares.
Example: You hold an XYZ $50 Put - after the 1:2 consolidation, you may hold one XYZ (1) $50 Put (with a deliverable of 50 shares instead of the typical 100).
Special Cash Dividends
While regularly scheduled dividend payments are often “priced into” options contracts, special dividends can shake things up if they are announced after you've bought or sold an option. In many cases, the strike price of your option may be
adjusted downwards to account for the special dividend amount.
For example, if a one-time special cash dividend payment of $10 is made, a call option with a $40 strike price could potentially be adjusted to a $30 strike.
If a company announces a special cash (or even stock) dividend, it’s very important to check the relevant clearing corporation’s (MX or OCC) website for updates
about the terms of the options adjustment.
Be aware that companies may label stock or cash payouts to shareholders differently, such as “dividend”, “distribution”, or “spin-off”, and each term can have different tax implications for both the issuing firm
and the recipient shareholder.
However, for those trading options, what matters more is if these payouts lead to contract adjustments, not what they are called. Therefore, if a company declares a special stock dividend, a special cash dividend, a distribution, or a spin-off, and
you hold an option on that company's stock, keep an eye out for potential contract adjustments.
Questrade does not provide tax or accounting advice. These materials have been prepared for your information only and are not intended to provide, and should not be relied on for, tax or accounting advice. You should consult your own tax and accounting
advisors for these matters.
Trading in options is not suitable for many members of the public. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. Transactions in Options
carry a high degree of risk. Purchasers and sellers of Options should familiarize themselves with the type of Option (i.e. put or call) which they contemplate trading and the associated risks. For more information, please refer to our complete Options
Risk disclosure.