What happens to an options contract after a stock split?

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Accepted Answer

Let’s start off with what we’re talking about, here. A stock split is when a company increases the number of outstanding shares. Companies perform stock splits for myriad reasons, but one common reason is to boost liquidity in the stock. Another reason is when a stock price has become too high for investors, and a stock split can create accessibility for lower price-per-share entry, with the lower share price appearing more attractive to investors.

On the other hand, stocks can perform a reverse stock split, wherein the company will lower the number of outstanding shares, raising the price-per-share. This generally occurs if a stock is facing the risk of delisting from an exchange.

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.

Let’s map out an example of a stock split here. Walmart $WMT recently performed a 3:1 stock split. Post-split, the owner of 1 share would now have 4 shares when adjusted for the split.

Let’s say the trader in the above picture is you. You own a single $WMT $180C 5/17/2024 contract, and paid $2.40 for it. After the $WMT 3:1 stock split finalizes, the options contract price will adjust by (roughly) the same ratio as the stock; 3:1, and the strike of your contract will also adjust. So post split, you will own 3 contracts of the $WMT $60C 5/17/2024.

The cost of those contracts also adjusts. Just like with the stock split, there's no change to your total equity. So the total premium you spent ($240) remains unchanged. The only change is instead of owning one contract at $2.40, you now own 3 contracts at $0.80 each, assuming all other factors remain equal (such as stock price fluctuation).