Adjusting Stock and Strike Prices for Option Moneyness

Summary

The note explains how to align stock prices and option strikes when calculating moneyness from stock and option datasets. The necessary treatment depends on whether the stock prices are raw or already adjusted. It distinguishes cash dividends from splits and other capital restructurings, because these events affect the relationship between the share price and the contract terms differently.

A dividend reduces the stock price by the dividend amount, while the option strike remains unchanged. Following a split, option contracts are adjusted by issuing new series with strikes that correspond to the post-split share price. The example shows a share price and strikes halving after a two-for-one split. Older strikes may continue to be listed temporarily as special contracts and should be excluded from the described analysis. The note gives practical data-cleaning guidance, but does not specify a particular moneyness formula or explain how to identify adjustment status in a source dataset.

Key ideas

• Check whether stock prices are raw or adjusted before matching them to option records.
• Cash dividends affect the stock price but do not change option strikes.
• Splits result in adjusted option series with strikes aligned to the post-split share price.
• Exclude lingering special option contracts from the described moneyness analysis.

Tags

# Moneyness and option prices


# Moneyness and option prices












I'm attaching stock prices from CRSP to a dataset of option prices in order to compute the option moneyness.

I'm wondering whether I should adjust the underlying prices taking into account splits and dividend payments?

## Answer by Eli (score 1)

https://quant.stackexchange.com/a/15189

It depends whether the underlying prices you have are raw (unadjusted) or already adjusted.

Splits and dividends are two different cases:

- When dividend is paid the stock price drops by the dividend amount, but strike prices are not changed.

- When there is a split (or any other corporate action like capital restructure, spin off), new option series are issued with adjusted strikes. In that case the strikes should correspond to the new (post-split) underlying price.

For example:

Shares of ABC were traded at 100 per share. Strikes were 80, 90, 100, 110, 120. Split occurs with ration 1:2. The day after the split, a share of ABC is 50, and new adjusted strikes are issued: 40, 45, 50, 55 and 60.

It's important to remember, that old strikes are being listed for a while after the strike, but these options become "special" and should not be included in the analysis.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.