How to Calculate the Stock Split on a Call Option
Original post by Brian Huber of Demand Media
Investors normally welcome a stock split because it generally occurs after the share price has substantially appreciated. The split doesn't change the stock's value. Rather, it increases the number of shares and causes a commensurate decrease in price per share.
The same thing happens to the call options. The result of a stock split is adjustment in the number of options along with the exercise price. The number of call option contracts owned is increased. The price at which the call option holder is permitted to buy shares -- known as the strike price -- is reduced. A simple example is the familiar two-for-one stock split, in which the number of call options doubles and the strike price is halved.
Obtain the stock split ratio of old number of shares to new number of shares from any news release about the split. The written format of a two-for-one split is 2:1.
Multiply the number of call option contracts you own by the stock split ratio. For example, if you own five contracts before the split, you will own 10 after a 2:1 split.
Divide the strike price by the stock split ratio. If the strike price in your original contracts was 35, the new strike price after a 2:1 split is 17 1/2.
Tips & Warnings
- The number of shares represented by each call option contract does not change with a stock split. One call contract still provides an option to buy 100 shares.
- Ledger or spreadsheet
- The Options Clearing Corporation: Characteristics and Risks of Standardized Options
- TheOptionsInsider.com: How Stock Splits Affect Options
About the Author
Brian Huber has been a writer since 1981, primarily composing literature for businesses that convey information to customers, shareholders and lenders. Huber has written about various financial, accounting and tax matters and his published articles have appeared on various websites. He has a Bachelor of Arts in economics from the University of Texas at Austin.