What Happens to Options When a Stock Splits Exactly? (2024)

What Happens to Options When a Stock Splits Exactly? (1)

Trading Education Guides Options Trading

  • By Bullish Bears
  • Updated April 17, 2024

5 min read

  • Reviewed by Angelica Rieder
  • Fact checked by Lucien Bechard


What happens to options when astock splits? After a company sees a significant increase in its stock price, some will consider a stock split to keep the per-share price at a range where more buyers can buy shares. Some trading platforms still provide access to nearly any company with fractional share sales. A stocksplit increases the shares in circulation, but the current shareholders will receive a proportional number of shares to the number they hold.

What Happens to Options When a Stock Splits Exactly? (3)

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Table of Contents

  • What Happens to Options When a Stock Splits?
    • How Do Stock Splits Affect Options?
    • Fractional Share Options
    • How Do Stock Splits Affect Options?
  • Options and Reverse Stock Splits
    • Do Options Adjust for the Split?
    • Final Thoughts

What Happens to Options When a Stock Splits?

What happens to options when a stock splits? A similar process happens to any outstanding option contract called “being made whole.” The particular stock split announcement will determine the option’s “being made whole” adjustment. In the simple case, we have one call option for a stock trading at $100/share, and our option is for 100 shares at $102/share.

There’s an announced 2-for-1 stock split (the split ratio); the holder will receive an additional share for every outstanding share. The company’s market capitalization doesn’t go up. In general, when a 2-for-1 split happens, the value of the stock will go down by half. For every share owned, the shareowner starts with one share worth $100 per share. After the split, they have two shares worth $50 each.

What Happens to Options When a Stock Splits Exactly? (4)

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How Do Stock Splits Affect Options?

What happens to options when a stock splits? The “being made whole” calculation is nearly as straightforward with options. A typical option contract, like our example, is for 100 security shares at its determined strike price of $102/share with the defined expiration date with a 2-for-1 split.

To make this whole, the option contract will multiply the split ratio by 100. We go from one contract to two contracts of 100 shares, so 200 shares can be purchased with our example.

At the same time, the new strike price is found by dividing the old strike price by the split ratio 2-for-1 so that the strike price will drop from $102 to $51/share.

What happens to options when a stock splits? If there’s an uneven stock split, for example, a 5-for-2 or 3-for-2, the call option “make whole” adjustments are handled differently. Traders cannot hold a fractional option contract, which would result from a contract being adjusted in a 5-two or 3-for-2 ratio.

If there’s been a 3-for-2 split, we would see the contract jump from 100 to 150 shares (rather than 1.5 contracts for 100 shares), and our strike price would be $68/share. The date of the expiration for the option will remain the same.

What Happens to Options When a Stock Splits Exactly? (5) What Happens to Options When a Stock Splits Exactly? (6) What Happens to Options When a Stock Splits Exactly? (7)
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How Do Stock Splits Affect Options?

When you hold options and a stock split happens, you’re supposed to end up in an equal position as you started. We assume through the math that this is a fair deal. However, if you’re holding call options, you may be looking at higher commissions for winning more contracts.

Additionally, your options trading plan may not fit this number since you hold more contracts. The more options contracts you hold, the more losses can be amplified if there’s a price decline.

Since the share price drops due to a split, a $1 change in the underlying stock value will have a larger proportional change on the call option’s value.

The reduction in stock price may change the human perceived support and resistance levels. In the human mind, $50 may not be the same or as important as $100, even if mathematically they are.

What Happens to Options When a Stock Splits Exactly? (8)

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Options and Reverse Stock Splits

A similar process happens with a reverse split. If you have a call contract with a 1:4 reverse split, the number of shares for your contract will decrease from 100 to 25, and the strike price will also be multiplied by 4. The strike price would increase with our $102 call to $408/share.

In this case, we’ll potentially save on commissions. Ad the singledollar price movement won’t feel as mentally important. So, the $400 level may not “feel” as important as a $100 level. Perception is a reality many times.

Do Options Adjust for the Split?

  • The option appears mispriced. Check the string; the adjustment has occurred if all calls and puts in all strikes are different. Having mispriced options for an entire class is rare.
  • Two root symbols share the same strike price. Sometimes, an adjusted contract appears with a standard one; when looking at a string of option prices for the same stock, check if all the symbols are identical.These should have the same strike price but different option root symbols.The price differences between these two contracts may vary significantly.

Final Thoughts

What happens to options when a stock splits? Once you know the basics, understanding options and stock splits is easy. Just make sure to do the math right; as always, don’t put more than you’re comfortable with at risk. Options are a great way to grow a small account. But you have to be smart with it. Good luck with all your trades.

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What Happens to Options When a Stock Splits Exactly? (19)

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What Happens to Options When a Stock Splits Exactly? (2024)


What happens to options when a stock splits? ›

For example, if you buy a call option that controls 100 shares of XYZ with a strike price of $75. If XYZ announces a 2:1 stock split, the contract would now control 200 shares with a strike price of $37.50. On the other hand, if the stock split is 3 for 2, the option would control 150 shares with a strike price of $50.

What happens to options when a stock merger? ›

When a merger is completed the two companies that merged combine into a new entity. At that time, trading in the options of the previous entities will cease and all options on that security that were out-of-the-money will become worthless.

What happens to my stock when it splits? ›

A stock split lowers its stock price but doesn't weaken its value to current shareholders. It increases the number of shares and might entice would-be buyers to make a purchase. The total value of the stock shares remains unchanged because you still own the same value of shares, even if the number of shares increases.

What happens to options when stocks spin off? ›

If you own options on a stock that executes a spinoff, the new options contract ticker will have a number added to it. The expiration date on your contract won't change. Keep in mind, you won't be able to see this new ticker in the app unless you owned the option before the corporate action.

What happens to options when stock is halted? ›

A listing exchange decides to halt trading of an underlying security. Trading of options on these securities subsequently is halted across all listing option exchanges. The trading halt may be brief or long-term in duration. The listing exchange may eventually make the decision to resume trading.

What happens to call options if stock is delisted? ›

When a stock is delisted, options trading on that stock typically ceases. This means that options holders are no longer able to buy or sell their options on the open market. However, they still have the right to exercise their options if they choose to do so.

What happens to options during market crash? ›

When the market takes a nosedive, put options go up in value. Here's the lowdown: Down Means Up for Puts: Puts give you the right to sell a stock at a set price. So when stocks crash, these options become more valuable because they let you sell at higher prices than what the market's offering.

What happens when share options are exercised? ›

Exercising a stock option means purchasing the issuer's common stock at the price set by the option (grant price), regardless of the stock's price at the time you exercise the option.

What happens to options when a stock goes private? ›

If your employer goes private when your stock options are underwater, the acquirer may cancel your options without a payout. Alternatively, they may offer you a nominal payout for your options.

Should you buy before or after a stock split? ›

It's important to note, especially for new investors, that stock splits don't make a company's shares any better of a buy than prior to the split. Of course, the stock is then cheaper, but after a split the share of company ownership is less than pre-split.

What are the disadvantages of a stock split? ›

Disadvantages of a Stock Split

A company cannot rely on a stock split to increase its value or market cap. A stock split divides the existing shares, thus keeping the market cap the same as before. Not to forget, a company must invest some amount to conduct a stock split.

What effect occurs when a stock split is declared? ›

A stock split increases the number of shares outstanding and lowers the individual value of each share. While the number of shares outstanding change, the overall market capitalization of the company and the value of each shareholder's stake remains the same.

What happens to options when stock splits? ›

A conventional stock split is a fairly clean increase of position size and a strike price adjustment and doesn't affect the value of an options position. It only means that the investor will be holding a greater number of contracts at a lower price.

When should you cash out stock options? ›

Deciding when to exercise stock options should be largely dictated by your vesting schedule. Vesting criteria restrict your ability to cash in on your options until you meet certain thresholds, which are typically based on your tenure at a company or performance level.

Can stock options be taken away? ›

If your vested stock options are not exercised prior to the expiration of the post-termination exercise period, they expire and are canceled! The post-termination exercise period generally starts on the date of termination (ie, the actual end of your service with your employer, not the date when you give notice).

Is it better to buy before or after a stock split? ›

It's important to note, especially for new investors, that stock splits don't make a company's shares any better of a buy than prior to the split. Of course, the stock is then cheaper, but after a split the share of company ownership is less than pre-split.

How do reverse splits work? ›

A reverse split takes multiple shares from investors and replaces them with fewer shares. The new share price is proportionally higher, leaving the total market value of the company unchanged.

Should you sell after a reverse stock split? ›

Selling before a reverse stock split is a good idea, but selling after the reverse stock split is not. Since you can sell before and after a reverse stock split, selling during one is optional. The main advantage of selling before the reverse stock split is that you don't have to wait around for it to happen.

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