And Other Corporate Action Questions Corporate actions such as stock splits, special dividends, mergers and acquisitions are quite common, but what happens with unexpired options? By Peter Klink June 22, 5 min read 5 min read Photo by Getty Images It seems like each month or so there's a major company announcement—a mega-merger, acquisition, stock split, or a special dividend—but these are just the big ones we hear about.
You may notice that the weekly cycles are more present in the near-term, while the longer-term cycles are primarily monthlies. Longer-term expirations will typically consist of standard monthlies because weeklies aren't listed until a few weeks before their expiration dates. Alright, so you know what an option's expiration date is, but how do you choose which one to trade in? In the next section, we'll discuss how you can go about choosing an options expiration cycle to trade.
In actuality, such events, commonly referred to as "corporate actions," occur pretty much every day, at companies big and small. The terms of listed option contracts, too, are often adjusted; depending on the specifics, certain option contract terms and obligations, such as the strike price, multiplier, or the terms of the deliverable, could be altered.
And because these alterations often result in contract terms that fall non- standard trading the standard, share contracts, they are often referred to as "non-standard options. It doesn't need to be. Remember, these adjustments are made in order to keep valuations and obligations intact after a corporate action.
For example, suppose Company XYZ announces a 3-for-1 split as of a specific date the "adjustment date". Suppose further that you had purchased a strike put option that is set to expire after the adjustment date.
Although the actual terms will be decided by a committee see the next section belowafter the adjustment is made, you'd likely hold 3 put option contracts, each with a strike price of All other terms would non- standard trading remain the same.
Once again, from a fundamental standpoint anyway, nothing has changed. In the world of option adjustments, even splits like the example above are relatively straightforward.
Others, such as an odd-ratio split like oror an acquisition involving fractional share transfer or cash-and-stock, can get complex. And oftentimes, strike prices won't be a round number, but rather rounded to the nearest penny.
DTCC determines how shares will trade pre-event. The OCC, the central clearer for listed options in the U.
How Do Non-Standard Options Work?
The OCC Securities Committee and an "adjustment panel," comprising two representatives from each exchange that lists that company's options, plus one OCC representative, decide whether an adjustment is called for, and how it should be structured. The decision is binding to all investors. A detailed memo on each corporate action and any resulting adjustment determinations is posted to the OCC website.
The options exchanges will usually issue adjustment memos on non- standard trading websites as well. Although adjustments are determined on a case-by-case basis, each type of corporate action is typically adjusted per table 1 below. Market Adjustment Whole Splits, etc. Odd Splits, etc. Cash Dividend.