How Stock Splits Adjust Existing Call Options

Summary

The document explains what happens to a call option when the underlying company splits its stock. For a two-for-one split, the option adjustment halves the strike price and doubles the number of option contracts, preserving the position’s overall economics as the share price adjusts. The split therefore does not leave the holder with an economically equivalent call at an unchanged strike.

The response distinguishes simple two-for-one splits from nonstandard adjustments, such as a three-for-two split, mergers, and certain share dividends. Those events can change the deliverable and leave adjusted options that are less actively traded, because newly listed standard options use the usual 100-share deliverable and may attract liquidity. The account is a concise explanation rather than a full treatment of every corporate action; actual contract adjustments depend on the terms set for the event. Its central practical point is to consider both economic adjustment and liquidity when holding options through corporate actions.

Key ideas

• A two-for-one split halves an existing call’s strike and doubles the number of contracts held.
• The adjustment preserves the economics of the original position through the split.
• Nonstandard corporate actions can create options with nonstandard deliverables.
• Adjusted contracts may have less liquidity than newly listed standard options.

Tags

# What happens when you buy call options on a stock that does a stock split


# What happens when you buy call options on a stock that does a stock split












suppose i say lyft in 2023 will be worth more then 50 per share (the current call price for the option). suppose im right and each share is worth 75, but in the interim lyft announces a 2-1 stock split and is now worth 37.50 per share. does the call price coordinate with the stock split, and become 25? or is part of the risk of buying options that the stock may split and youre left with a way overvalued option?

## Answer by kdragger (score 3)

https://quant.stackexchange.com/a/66285

Yes. The Options Clearing Corp handles this in a way that you would expect.

2 for 1 splits are easy: strike prices are halved and you get 2 for every 1 that you had before. Then everything continues trading as before.

Non-standard splits, mergers, and other share dividends become more complex. On a 3 for 2, split, the share count is changed, the strikes are changed, and then you are left with non-standard options. All the economics are fine, but the problem is that all new standard options are then listed with the 100 share deliverable. It means that the new options take all the liquidity and your "old" options are kinda orphaned. To reiterate: that is not the case for a 2 for 1.

hth

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