Series 7: 5.6.3 Stock Splits And Dividends

5.6.3  Stock Splits and Dividends

Should a dividend become due or a stock split occur at a time when one has an options position, the owner of the option on the ex-date (ex-dividend date or ex-split date) will receive the benefit of the dividend or split.

With a stock split, the option will be adjusted to reflect the change, leaving the value of the contract essentially the same. The number of options shares or contracts will be increased to reflect the split and the exercise price will decrease proportionately. For example, a stock split, such as a 2:1 split, will result in a doubling of the number of contracts and a halving of the strike price.

Example: Morgan Steel (MGST) announces a 3:1 stock split effective May 31. Robert currently owns two contracts of the MGST July 60 Call. After the split, he will own six contracts of an MGST July 20 Call. In a 3:1 split, his number of contracts will triple and the exercise price of $60 will decline to one third of its former value. If h