What happens to options contracts after a split?

What happens to options contracts after a stock split?

A company many decide to split its stock for a variety of reasons.

Before we get into the weeds of this concept we should lead off that a split (or reverse split) does not increase or decrease a company's market capitalization.

A commonly cited reason for a company to split its stock is if the company's stock price has risen to a price point that may be too high for investors. A split would result in a lower share price, and can be seen as a more attractive price for investors.

$AMZN, $TSLA, and $GOOG have all recently undergone normal stock splits.

On the other hand if a company's stock price is too low it can face delisting. A company can face delisting from the NASDAQ if the company trades for 30 consecutive business days below the minimum closing bid requirement, which is typically $1.00. A company may undergo a reverse split in order to meet this minimum bid price requirement.

Chinese Crypto miner $SOS recently underwent a 1:50 reverse split.

Similarly to when a stock splits (or reverse splits) there is no equity gained or loss. The number of shares outstanding will increase (normal split) or decrease (reverse split), but the company's market capitalization will remain the same.

The same will apply to your contracts.

$GME Gamestop shares recently underwent a 4:1 split. The owner of 1 share would now have 4 shares on a split adjusted basis.

Let's say you owned a singular $GME 100c 1/2023 (a fictional contract for the sake of the example). Post split you would now own 4 contracts of $GME 25c 1/2023. Each of these contracts still controls 100 shares of GME (but adjusted for the split).

The same math can be applied for put contracts. The owner of a $GME 100p 1/2023 would own, post split, 4 contracts of 25p 1/2023.

But what about for reverse splits?

Fictional company $XYZ is trading at $1.00, and is set to undergo a 1:10 reverse split. Post split these shares will trade for $10.00.

The owner of a singular $1p 1/2023 would now own a singular $10p 1/2023, but each of these contracts would only represent 10 shares, as opposed to the normal 100. This is due to the nature of the reverse split: presplit a $1p would represent 100 shares, for a total equity of $100. Post-split a $10p controlling 10 shares would have equal equity at ~$100.

A feed of stock splits, upcoming and previous, along with the split ratios can be found on the Unusual Whales website here: https://unusualwhales.com/flow/splits