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Adjusted Options

Options involve risk and are not suitable for all investors.
Options involve risk and are not suitable for all investors. Certain requirements must be met to trade options. Before engaging in the purchase or sale of options, investors should understand the nature of and extent of their rights and obligations and be aware of the risks involved in investing with options. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options (PDF)" before considering any option transaction. You may also call the Investment Center at 877.653.4732 for a copy. A separate client agreement is needed. Multi-leg option orders are charged one base commission per order, plus a per-contract charge.

An option is derivative based on the underlying security specified in the contract, therefore if something occurs to the underlying it must be reflected in the options contract resulting in an adjustment. An adjusted option exists when the original terms of the option contract are amended. Various types of corporate actions such as, stock splits, mergers, dividends, acquisitions, spin-offs or similar events relative to the underlying may cause an option to become adjusted.
Adjusted options are sometimes referred to as packaged options or non-standard options.

What happens to an adjusted option?

Outstanding option contracts will have their terms/deliverables adjusted for any reorganization/corporate action events that occurs between contract issuance and expiration. The terms of the adjustment are determined by the Options Clearing Corporation (OCC) and can be found on the OCC web site popup via the information memos. The adjustment terms are not the same for each corporate action. Therefore, it is important to look carefully at the terms of the adjustment. Adjustments can result in an acceleration of expiration, strike price adjustments or a change in the deliverables. The adjustment is in effect based on the effective date as outlined in the OCC memo, and remains in the adjusted state until the contract ceases trading or a new memo is issued.

Reverse Split Hypothetical Scenario

XYZ Corporation announces a 1 for 2 reverse stock split. This will result in half the amount of shares at double the price. For example, a stock holder of 100 XYZ shares trading at $100.00 per share will receive 50 shares of XYZ trading at $200.00 per share.
In this hypothetical scenario, a purchaser of 1 XYZ $90.00 Call at $10.00 will receive a contract adjustment. Remember, when this contract was issued, it contained the right to buy 100 shares of XYZ at $90.00 per share at any time within the expiration window. Since all outstanding shares of XYZ have changed, the options will adjust. For example, the OCC determines an adjustment to the deliverables:
  • Original Deliverables: 100 Shares of XYZ at a Strike Price of $90.00
  • New Deliverables: 50 Shares of XYZ , Strike Price Unchanged, Multiplier Unchanged
The purchaser of this option can look at the total value of the deliverables in comparison to the market and determine if the contract is in-the-money or has any intrinsic value. The original exercisable value will remain the same. For example, if XYZ is trading at $200.00 per share, at first glance, 1 XYZ $90 Call will seem deep in-the-money. The market price of $200 is above the strike price of $90.00, after all. This is why the total value is taken into consideration for adjusted options:

Special Cash Dividend Hypothetical Scenario

ABC Corporation announces a special cash dividend of $12.00 per share to shareholders. This means every shareholder who owns ABC stock prior to the ex-dividend date will receive the dividend. For example, a stock holder of 100 ABC shares trading at $100.00 per share will receive a cash dividend on the payment date of $1200.00 — if they owned ABC prior to the ex-dividend date. On the day of the ex-dividend, ABC will begin to trade without the dividend. In this example, if all other factors remained the same, ABC would be $88.00 ($100.00 Stock Price - $12.00 Dividend) — this is because any purchases of ABC beginning on the ex-date will not be entitled to receive the dividend.
In this hypothetical scenario, a purchaser of 1 ABC $90.00 Call at $10.00 prior to the ex-date will receive a contract adjustment. Remember, when this contract was issued, it contained the right to buy 100 shares of ABC at $90.00 per share at any time within the expiration window. Since all shareholders of ABC are entitled to a special dividend, the option will adjust. For example, the OCC determines an adjustment to the deliverables:
  • Original Exercisable Value: $9,000.00 (100 ABC at a strike price of $90.00)
  • New Deliverables: Cash Value of $1,200.00, Shares Unchanged, Strike Price Unchanged, Multiplier Unchanged
The purchaser of this option can look at the total value of the deliverables in comparison to the market and determine if the contract is in-the-money or has any intrinsic value. The original exercisable value will remain the same. For example, ABC is trading at $88.00 per share, at first glance, 1 ABC $90.00 Call will seem out-of-the-money. The market price of $88.00 is below the strike price of $90.00, after all. This is why the total value is taken into consideration for adjusted options:
  • Original Exercisable Value: $9,000.00 (100 ABC at a strike price of $90.00)
  • New Deliverable Market Value: $10,000.00 (100 ABC at a market price of $88.00 = $8800.00 + $1200 Cash)
  • Total In-the-Money (Intrinsic) Value: $1,000.00 ($10,000.00 Market Value - $9,000.00 Exercisable Value)
  • Per Contract Intrinsic Value: $10.00 ($1,000.00 Value/ 100 Multiplier)
Essentially, the total market value of the contract remains the same. As most option contracts represent 100 shares of the underlying security, the adjustment will reflect the total value of owning the 100 shares. The deliverables and terms of the adjustment will vary.

How do I tell if an option is adjusted?

  • In the option chain, an 'A' will appear next to the symbol and the symbol will contain an extra number — signifying an adjustment.
  • An option prices relative to the underlying position. Therefore, if the price of the option seems mispriced relative to the underlying an adjustment might have occurred.
  • You may see an option with low volume and low open interest in comparison to the other options in the series -- adjusted options tend to lose their liquidity due to their complexity.
  • Strike prices may not flow with the rest of the options chain. When the underlying continues to trade after a reorganization/corporate action, new un-adjusted options are issued. This can cause multiple options to display at the same strike price. Multiple calls or puts with the same expiration and same strike price displaying may be an indication of an adjusted option.

What should I know if I have an adjusted option?

  • Due to the complexity of adjusted options, Merrill blocks all opening online orders.
  • The terms of the adjustment can be found on the OCC web site popup by searching for the underlying in the information memos.
  • Please call Merrill with any further questions.
Options involve risk and are not suitable for all investors. Certain requirements must be met to trade options. Before engaging in the purchase or sale of options, investors should understand the nature of and extent of their rights and obligations and be aware of the risks involved in investing with options. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options (PDF)" before considering any option transaction. You may also call the Investment Center at 877.653.4732 for a copy. A separate client agreement is needed. Multi-leg option orders are charged one base commission per order, plus a per-contract charge.
View definitions for investment terms in our Glossary.
For purposes of all the computations discussed in this article, commissions, fees and margin interest and taxes, have not been included in the examples. These costs obviously will impact the outcome of any stock or option transaction. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation or solicitation to buy or sell securities. Past performance is not a guarantee of future results.
This material is being provided for informational purposes only. Nothing herein is or should be construed as investment, legal or tax advice, a recommendation of any kind, a solicitation of clients, or an offer to sell or a solicitation of an offer to invest in options. The information herein has been obtained from third-party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed.

Supporting documentation for any claims, comparisons, recommendations, statistics or other technical data will be furnished on request.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
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Investing in securities involves risks, and there is always the potential of losing money when you invest in securities.

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Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

This material is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or investment strategy. Merrill offers a broad range of brokerage, investment advisory (including financial planning) and other services. Additional information is available in our Client Relationship Summary (PDF).

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