How Stock Splits and Dividends Affect Options Contracts
When you are an options investor do you know what happened when you are investing in an option that splits or pays a dividend? Do you know how the option is effected or if there is any cost associated with it? When you invest in options, this list is some things that you should keep in mind. If, you know the option you are buying is going to split, or it has a dividend ex-date coming up.
Stock Splits and Options
Stock splits occur every once in awhile and when they do they are usually capital news. Those who have owned stock in the company now have twice as many or more shares available at a better price. Options are certainly not to different in that aspect. The Options clearing board will automatically adjust your stock options so that you do not lose any money in the transition of a stock split.
For example, let’s look at an ordinary stock split. Let’s say you have 10 options purchased for X company. They are currently trading at 50.90 dollars a share. Now, the options are set to expire in about a month, so there is plenty of time on them yet. The current strike price is 50$ on the options. The options currently have a market value 0f 3.50
Now the stock is going t split in a 2 for 1 format it will drop immediately in value to only 25.45 on the next market bell. The OOC will automatically convert your 10 options and turn them into 20 at the appropriate price on the opening bell. So, now you have 20 options, the contract price is adjusted to 1.75, and you still have the same amount of options you had at the same amount of worth.
Now the value of your stock options is not in question what is what happens when the price after the stock split moves. Now if, your stock options had remained at 50.90 cents and it falls 1 dollar that is not too much to lose. Now that you have 20 options at 25.90 a dollar fall can dramatically swing the price of the options. Along with the loss of value you now have 20 options to sell which is going to cost more in commission trades. So, just be aware of these two different types of possibilities when trading options and a stock will split.
Stock Dividends and Options
Just like when you have options on the market during a split, it is also necessary to learn what happens when the stock has a dividend attached to it. When you purchase an options contract 85% of the time the dividends are not reflected in the options contract price. Dividends in general do affect the stock price when they are trading on the market. This adjustment can be seen in the value of your options by quite a bit. The effects of the dividend will always be opposite for call and puts on option contracts.
When a dividend payout date is coming, you will always see the stock price start to rise. This increases the value of calls on the options contracts that you have. On the other hand if you have a put contract it will decrease the values of that option in the same way. On the date after the dividend is paid, the stock will usually fall, and reflect the payout without the dividend in the value of the stock.
Splits and dividends are always something to keep an eye out when trading on the options market. It can affect your bottom line in calls, puts, and commissions that you end up paying. Again do your research before you invest in any type of investment.