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Options FAQ - Splits, mergers, spinoffs & bankruptcies
| Q: |
What happens if I am short calls in the stock of a company which is subsequently taken over before the expiration date? |
| A: |
Corporate actions such as mergers, acquisitions and spin-offs will often necessitate a change to the amount or name of security that is deliverable under the terms of the contract. When such adjustments occur, the short call position is responsible for delivering the adjusted security.
For example: The shareholders of company JKL Inc. have approved a takeover bid placed by Global Giant Co. As a result, holders of JKL stock will now be entitled to a 1/2 share of Global Giant for every share of JKL Inc. they own. Therefore, holders of JKL call options will now be entitled to a deliverable amount of 50 shares of Global Giant for every contract of JKL that they are long (100 shares per contract x .5 Global Giant). Investors with short positions in JKL call options would then be responsible for delivering 50 shares of Global Giant for every call option assigned.
For the sake of this example, a simple conversion ratio was used, though not all corporate actions result in such clearly defined terms. Often assignment will require the short position to deliver fractional shares plus cash equivalent. An adjustment panel consisting of representatives of the listing options exchanges and OCC (who only votes in case of a tie) makes a determination whether to adjust an option as a result of a particular corporate action by applying general adjustment rules. Again, whatever the terms, the short position has the potential obligation of delivering the adjusted underlying.
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| Q: |
What happens with my options contracts when a company is delisted from an options exchange? |
| A: |
If a stock fails to maintain the minimum standards for price, trading volume and float prescribed by the options exchange, option trading can be wound down even before the stock is delisted by its primary market. In that case, no new series would be added at expiration. Trading in existing series would continue until they go "off the board". If trading in the underlying stock is suspended by its primary market for an extraordinary reason before the expiration of outstanding options, the options exchange will specify a procedure for the orderly liquidation of option open interest in a special bulletin.
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| Q: |
I was wondering if there is an industry standard to how options holdings are adjusted to reflect a stock split or stock dividend on the underlying security. |
| A: |
You can see a basic discussion on how options are adjusted in Chapter III from The Characteristics and Risks of Standardized Options or review an online class on option adjustments due to corporate actions.
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| Q: |
XYZ Inc.'s stock was recently trading at .60 cents before undergoing a 1 for 10 reverse stock split and is now trading at $6.00. Is my call option with a strike of $5 that was outstanding at the time of the reverse split now in-the-money by $1.00? |
| A: |
No. The call option should not be in-the-money. All XYZ Inc.'s option contracts that were outstanding on the effective date of the 1 for 10 reverse split have would be adjusted to reflect the reverse split. An option contract for a reverse split is typically adjusted as follows:
Strike Price - No change
Number of Contracts - No Change
Multiplier - Strike Price and Premium Multiplier remains 100
New Deliverable per Contract - 10 shares of XYZ Inc.
The value of 10 NEW shares of XYZ Inc stock @$6.00 per share is $60.00 dollars. The value of the strike price (if exercised) is $500.00. To determine the point at which the post-split stock needs to be for the $5.00 call to be in the money, divide the value of the strike ($500.00) by the number of shares that Underlies the contract (10). This would indicate that the stock would need to be trading above $50 per share for this adjusted contract to be in the money.
For additional educational information concerning adjustments to options due to splits and mergers please refer to our online interactive classes.
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| Q: |
I currently have a covered call written against my AT&T stock position. How will my option contract be adjusted due to the AT&T spin-off of its broadband unit, the subsequent merger of the broadband unit with Comcast Corp and AT&T's 1:5 reverse stock split? |
| A: |
As a general rule of thumb, if an investor is covered when he/she enters into an option contract, he/she is typically covered throughout the life of the option. The standard 100 share AT&T option will be adjusted in the same manner as 100 shares of AT&T stock. On the effective date of the spinoff/reverse split, the holder of 100 shares of AT&T will be the holder of 20 shares of "new" AT&T and approximately 32 shares of Comcast Corporation. The option contract will be adjusted in the same ratio as 100 shares of stock. The number of contracts and the strike and premium multiplier will remain 100. The new deliverable for the option contract will be 20 shares of "new" AT&T and approximately 32 shares of Comcast Corporation. Currently, adjusted options already exist for AT&T due to the spinoff of AT&T Wireless Services, symbol AWE. These options will be adjusted further to reflect the current spinoff/reverse split.
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| Q: |
I own a September call option for company XYZ. News has come out stating that XYZ is the subject of a cash buyout that is expected to close in May. Assuming that the merger is approved, what can I expect to happen to the call option I own. |
| A: |
When an underlying security is converted into a right to receive a fixed amount of cash, options on that security will generally be adjusted to require the delivery upon exercise of a fixed amount of cash, and trading in the options will ordinarily cease when the merger becomes effective. As a result, after such an adjustment is made all options on that security that are not in the money will become worthless and all that are in the money will have no time value.
Review an online class to learn more about how options are adjusted due to corporate actions.
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Important Note: Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.
Content Licensed by the Options Industry Council. All Rights Reserved. OIC or its affiliates shall not be responsible for content contained on the E*TRADE Securities Website not provided by OIC. Content licensed by the Options Industry Council is intended to educate investors about U.S. exchange-listed options issued by The Options Clearing Corporation, and shall not be construed as furnishing investment advice or being a recommendation, solicitation or offer to buy or sell any option or any other security. Options involve risk and are not suitable for all investors.
No information provided by The Options Industry Council Website has been endorsed or approved by E*TRADE Securities LLC, and E*TRADE Securities is not responsible for the contents provided by The Options Industry Council.
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Refresh March 07, 2025 12:27 PM ET
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