Asked by jayla houser on May 11, 2024
Verified
What happens to an option if the underlying stock has a 2-for-1 split?
A) There is no change in either the exercise price or in the number of options held.
B) The exercise price will adjust through normal market movements; the number of options will remain the same.
C) The exercise price would become one-half of what it was, and the number of options held would double.
D) The exercise price would double, and the number of options held would double.
E) There is no standard rule-each corporation has its own policy.
Exercise Price
The specified price on an option contract at which the option holder can buy (in the case of a call option) or sell (in the case of a put option) the underlying asset.
2-for-1 Split
A stock split in which a company divides its existing shares into two, reducing the price per share while keeping the total market capitalization the same.
Underlying Stock
The stock that is the basis or the security that options, futures, or other derivatives contracts are derived from or based upon.
- Understand the effect of stock splits on option terms.
Verified Answer
MR
Mustafa RushdiMay 17, 2024
Final Answer :
C
Explanation :
In a 2-for-1 stock split, the exercise price of an option is adjusted to half of its previous value, and the number of options held by an investor doubles. This adjustment ensures that the total value of the options remains the same post-split, maintaining the economic position of the option holder.
Learning Objectives
- Understand the effect of stock splits on option terms.