Asked by Jessica Tufts on May 12, 2024
Verified
What happens to an option if the underlying stock has a 3-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-third of what it was, and the number of options held would triple.
D) The exercise price would triple, and the number of options held would triple.
E) There is no standard rule-each corporation has its own policy.
Exercise Price
The specified price at which an option contract can be executed, typically referring to the buy (call) or sell (put) price for stocks.
3-for-1 Split
A stock split in which shareholders receive three shares for each share they hold, effectively reducing the stock price and making the shares more affordable, while keeping the overall valuation of the company the same.
Underlying Stock
Refers to the basic stock that an options or futures contract is based upon.
- Comprehend how option terms are influenced by stock splits.
Verified Answer
NP
Nicolas PedrazaMay 15, 2024
Final Answer :
C
Explanation :
In a 3-for-1 stock split, the exercise price of an option is adjusted to one-third of its pre-split price, and the number of options held by an investor triples. This adjustment ensures that the total value of the options remains the same post-split as it was pre-split, maintaining the economic equivalence for the option holder.
Learning Objectives
- Comprehend how option terms are influenced by stock splits.