Adjusted Options

With 2 major stock splits from TSLA (effective date TBD) and AMZN (effective on 06/06/2022) on the horizon, we’ve been receiving a ton of questions regarding what happens to an options position after a stock split. So, in this post, we’ll take a dive into how options contracts are adjusted based on a stock split.

What is a stock split?

A stock split can be issued as a forward or reverse split. The intent of splitting the stock is to either lower the trading price or raise the trading price without any impact on the stock valuation.

Essentially, the total market value remains by either increasing the number of shares outstanding and lowering the price OR reducing the number of shares outstanding and raising the price.

How does the type of split affect the options adjustment?

Firstly, the answer depends on the type of the split and the split factor. Whether it is a stock split or reverse split helps determine the adjustment on the options contracts.

Moreover, the split factor, whether it’s split by a number that’s divisible into 100, such as 5 to 1, or something that’s not, such as 7 to 1, also is considered. Remember, 1 contract generally represents 100 shares of deliverables – therefore, the contract adjusts typically to an equivalent value like the adjustment outcome for 100 shares of the stock.  

What is adjusted in a stock split with my option?

There are 3 potential adjustments to an options contract after a stock split—the number of contracts you own, the strike price, and the premium multiplier. With most even splits, only the contracts and strike prices are adjusted. When there are uneven splits, typically, we will see the contract multiplier change as well. 

Upcoming AMZN 20 for 1 Stock Split on June 6, 2022

Let’s start with an easy example with the upcoming AMZN stock split that is set to be approved on May 27, 2022, for a 20 to 1 stock split. This is a normal stock split with a factor that is divisible by 100. In this scenario, for each options contract you own of AMZN before the split, you will have a total of 20 contracts with a new strike price that is 1/20th of the original strike price after the split. 

Here is a great way to break it down: let’s say AMZN is at $2500/ share and look at what would occur with the stock and option pre- and post-split.

The purpose of the split is to lower the stock price to make the stock more widely accessible. The total value you begin and end with will be the same number.

The stock price will decrease by 20x – therefore, the number of shares will increase by 20x, resulting in the same value. The same applies to the deliverables of your options, as shown in the table below.

For example, if you owned 2 Contracts of the July $2500 Calls before the split, you would now have 40 Contracts (2 x 20) of the July $125 Calls ($2500 ÷ 20) after the split.

While the upcoming TSLA stock split has not been confirmed, the August 2022 shareholding meeting will likely see this put up for a vote. Additionally, the split factor has not been determined, but the stock had a 5 for 1 stock split in 2020. 

What happens with a reverse stock split or a split factor that doesn’t divide into 100?

When there is a reverse stock split, such as with GE recently or AAPL’s famous 7 for 1 stock split, the adjustment factor typically includes changing the premium multiplier of the options contract in addition to the # contracts and the strike price.

To find out more about the adjustment factor for a specific symbol, please visit the OCC’s Memo website to find the details for each options adjustment for an upcoming corporate event. Remember that mergers, acquisitions, and special dividends are also other events that may trigger an adjusted option.