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Stock splits and options

Q: I own options on a stock that has just declared a 2 for 1 stock split. What happens to my options?

A: Your options will need to undergo an adjustment. Instead of covering for 100 shares, your options will now cover 200 shares but the exercise price is cut to half. This adjustment is performed automatically by the Options Clearing Corporation. In general, adjustments are made for options whenever there is a stock dividend, stock distribution or stock split.

Example

Before a 2 to 1 stock split, an investor holds a call option covering 100 shares of XYZ stock with a strike price of $50. After the adjustment, he will hold two call options with strike price of $25.

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