When are adjustments made to option contracts?
What is a contract adjustment?
An option contract may be adjusted due to stock dividend, stock distribution, special cash distribution, stock split, reverse stock split, rights offering, reorganization, recapitalization, reclassification, merger, consolidation, dissolution or liquidation of the underlying security. To see if an option contract has been adjusted, please search the option symbol on the OCC website.
Are strike prices adjusted to account for regular cash dividends?
As a general rule, no adjustment is made for ordinary cash dividends or cash distributions. A cash dividend or distribution will generally be considered “ordinary”, regardless of size, if the OCC believes that it was declared pursuant to a policy or practice of paying such dividends or distributions on a quarterly or other regular basis.
What events trigger option contract adjustments?
When adjustments are made to an option contract, the following may be modified:
- Deliverable
- Strike prices
- Contract multiplier
- Option symbol
Stock dividends, stock distributions and stock splits may result in an adjustment of the number of options held or written, or the number of underlying shares, and in some cases may also result in an adjustment of the exercise price.
Reverse stock split, combination of shares, or similar event will generally result in an adjustment in the number of shares deliverable upon exercise, while the aggregate exercise price remains unchanged.
Please see below a summary detailing adjustments made to the most common types of corporate action events:
| Event | Definition |
| 2 for 1 stock split | A 2 for 1 stock split results in twice the number of shares at half the price. The holder of an option contract as a result of a 2 for 1 stock split will now have twice as many option contracts at half the strike price. |
| 3 for 2 stock split | A 3 for 2 stock split results in an additional .5 shares per 1 share held. The stock price is reduced by 1.5. The holder of an option contract will have the same number of contracts at a reduced (1.5) strike price. The contract will now represent 150 shares per contract. |
| 3 for 1 stock split | A 3 for 1 stock split results in 3 times the number of shares at 1/3 the price. The holder of an option contract will have 3 times as many contracts at 1/3 the strike price. |
| 4 for 3 stock split | A 4 for 3 stock split results in 1.33 times the number of shares. The stock price is reduced by 1.33. The holder of an option contract will have the same number of contracts at a reduced (1.33) strike price. The option contract now represents 133 shares per contract. |
| Reverse stock split | A reverse split results in the reduction of outstanding shares and an increase in the price of the underlying security. The holder of an option contract will have the same number of contracts with an increase in strike price based on the reverse split value. The option contract will now represent a reduced number of shares based on the reverse stock split value. |
| Other | Other examples of stock events that would trigger an option contract adjustment are mergers, acquisitions, and spinoffs. |
| Special cash dividend | A special cash dividend is outside the typical policy of being paid on a quarterly basis. Assuming a dividend is special, the value of the dividend must be at least $12.50 per option contract and then an adjustment will be made to the contract. |
| Special stock dividend | A special stock dividend is a dividend payment made in stock versus cash. The holder of an option contract will have the same number of contracts at a reduced strike price. The option contract will now represent the original share value plus the stock dividend. |