When companies announce stock splits, special dividends, mergers, or spin-offs, existing options contracts must be adjusted to maintain their economic value. Understanding these adjustments prevents confusion and helps you manage positions through corporate events.
Why Options Get Adjusted
Options contracts represent the right to buy or sell 100 shares at a specific price. When corporate actions change the value or number of underlying shares, options must be modified to keep the contract's economic value equivalent.
Core principle: Adjustments ensure that neither the option buyer nor seller gains or loses value solely due to a corporate action. The goal is economic equivalence.
Stock Split Adjustments
Standard Stock Splits
In a stock split, both the strike price and the number of shares per contract are adjusted proportionally.
2-for-1 Stock Split Example
Before split: 1 call option, $100 strike, controls 100 shares
After split: 2 call options, $50 strike, each controls 100 shares
Total shares controlled: Still 200 shares
Total economic exposure: Unchanged
3-for-1 Stock Split Example
Before split: 1 call option, $150 strike, controls 100 shares
After split: 3 call options, $50 strike, each controls 100 shares
Total shares controlled: Still 300 shares
Reverse Stock Splits
Reverse splits work the opposite way, reducing the number of contracts and increasing the strike price.
1-for-10 Reverse Split Example
Before split: 10 call options, $5 strike, controls 1,000 shares
After split: 1 call option, $50 strike, controls 100 shares
If you had fewer than 10 contracts, you might end up with an adjusted contract controlling fewer than 100 shares.
Non-Standard Splits
Splits like 3-for-2 or 5-for-4 cannot be evenly divided. These create "adjusted" or "non-standard" options with modified deliverables.
3-for-2 Split Example
Before split: 1 call option, $150 strike, controls 100 shares
After split: 1 call option, $100 strike, controls 150 shares
The contract now delivers 150 shares instead of the standard 100.
Caution: Adjusted options with non-standard deliverables often have reduced liquidity. New options with standard terms begin trading after the split, drawing volume away from adjusted contracts.
Special Dividend Adjustments
Regular quarterly dividends do not trigger options adjustments. However, special or extraordinary dividends typically do.
What Qualifies as Special
- One-time special cash dividends
- Dividends exceeding $0.125 per share
- Dividends greater than 10% of stock price
- Return of capital distributions
How Special Dividends Adjust Options
Strike prices are reduced by the dividend amount (rounded to standard increments).
Special Dividend Example
Stock price: $50
Special dividend: $5 per share
Before adjustment: $50 strike call
After adjustment: $45 strike call
The option deliverable remains 100 shares.
Merger and Acquisition Adjustments
When companies merge or one acquires another, options on the target company are adjusted based on the deal terms.
All-Stock Mergers
If Company A acquires Company B in an all-stock deal, Company B options are adjusted to deliver Company A shares based on the exchange ratio.
Stock Merger Example
Company A acquires Company B
Exchange ratio: 0.5 shares of A for each share of B
Before: Company B $100 call delivers 100 B shares
After: Adjusted option delivers 50 A shares at $100
Cash Mergers
If the acquisition is all-cash, options typically accelerate to expiration at a fixed price equal to the deal value.
Mixed Deals
Cash-and-stock deals result in options that deliver both shares and cash upon exercise.
Spin-Offs
When a company spins off a division into a separate publicly traded company, existing options are adjusted to deliver shares of both entities.
Spin-Off Example
Company XYZ spins off Division ABC
Shareholders receive 0.25 ABC shares per XYZ share
Before: XYZ $100 call delivers 100 XYZ shares
After: Adjusted option delivers 100 XYZ + 25 ABC shares at $100
Identifying Adjusted Options
Adjusted options have special symbols to distinguish them from standard contracts:
- Modified ticker symbols (often with numbers added)
- "Adj" or similar notation in the description
- Non-standard deliverables listed in contract specs
- Different multipliers than standard options
Trading Adjusted Options
Liquidity Concerns
Adjusted options typically have poor liquidity because:
- New standard options begin trading post-event
- Most traders prefer standard contracts
- Market makers quote wider spreads
- Open interest declines as traders close positions
Best Practices
- Consider closing positions before the corporate action
- If holding adjusted options, use limit orders
- Be patient when exiting adjusted positions
- Understand exactly what the adjusted contract delivers
Track Your Options Positions
Pro Trader Dashboard helps you monitor corporate actions and manage options positions through adjustments.
Where to Find Adjustment Information
- OCC (Options Clearing Corporation): Official source for all adjustments
- Your broker: Should notify you of pending adjustments
- Options exchanges: CBOE, NYSE, etc. publish adjustment memos
- Company investor relations: Details on corporate actions
Regular Dividends Are Different
Standard quarterly dividends do not trigger adjustments. Instead, they are factored into options prices through:
- Lower call prices (reflecting expected price drop on ex-date)
- Higher put prices (same reason)
- Early exercise considerations for deep ITM calls
Summary
Options contract adjustments maintain economic equivalence when corporate actions affect the underlying stock. Stock splits adjust strike prices and contract quantities. Special dividends reduce strike prices. Mergers and spin-offs change what the options deliver. While adjustments preserve value, they often create illiquid contracts that can be difficult to trade. When possible, consider closing positions before corporate actions or be prepared to manage adjusted options with patience and limit orders.
Learn more about options expiration and intrinsic value.