So you've taken the jump into options trading and you're doing pretty well. The call options you have purchased resulted in nice profits when the underlying stocks have climbed up through the options' strike price. Now the stock behind one of your call trades has declared a stock split, and you a wondering what will happen to your call options. To keep the value of your options in line with what happens to the stock when split, your options position will also be adjusted by the Options Clearing Corp. -- OCC -- and the changes will show in your brokerage account summary.
Look up the specifics of the stock split affecting your call options. Companies declare stock splits with a ratio of new shares for existing shares, such as 2 for 1 or 3 for 1. For this example, suppose you own five call options with a strike price of $75 on a stock with a current share price of $78, and the company has declared a 3 for 1 stock split.
Divide the strike price of your call options by the stock split ratio. In the example, after the stock split, your call options will have a strike price of $25 and the stock itself will go to $26 per share. The strike price of a call is the value at which an option can be exercised to buy the shares.
Multiply the number of call options you hold times the split ratio. If you had five calls before a 3 for 1 split, you will have 15 option contracts after the split. The increase in contracts maintains your relative profit position. For the example, before the split you owned five calls and each was $3 in-the-money since the $78 stock price was $3 above the $75 option strike price. After the split, you will hold 15 call option, with each $1 in-the money.
- Although the adjustments to your call option position do not change the relative value of your trade, your position does become more sensitive to changes in the stock price. In the example, before the split a $1 change in the stock would change the value of the five contracts by $100 each. After the split, a $1 price change affects 15 contracts by $100 each.
- One call option contract is for 100 shares of the underlying stock, so stock price changes affect the option value by a multiple of 100.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.