Quick Answer
The Options Clearing Corporation adjusts options contracts, and exchanges adjust open orders, after stock splits and stock dividends. A forward split adjusts open orders and increases the contract count, but a reverse split cancels open orders. Market orders are never adjusted, regardless of the type of split.
After a stock split or stock dividend, existing options contracts are adjusted to reflect the new share count and price. Open orders are adjusted after a forward split but canceled after a reverse split.
Options Contract Adjustments
The Options Clearing Corporation (OCC) adjusts options contracts for stock splits and stock dividends.
Forward split adjustments:
- Number of contracts increases proportionally
- Strike price decreases proportionally
- The total notional value of the position stays the same
Example: 2-for-1 split
- Before: 1 call option with a $80 strike (controlling 100 shares)
- After: 2 call options with $40 strikes (each controlling 100 shares)
- Total exposure: 200 shares at $40 = same $8,000 notional value
Think of it this way: A forward split is like cutting a pizza into more slices. You have more pieces, each one is smaller, but the total amount of pizza stays the same. The OCC makes sure your options reflect the new slice size.
Exam Tip: Gotchas
- Options adjustments are handled by the OCC, not by the individual broker-dealer. The OCC is the central clearinghouse for all listed options.
- The total notional value of adjusted options positions does not change. A forward split increases the number of contracts and lowers the strike proportionally, so the economics of the position stay the same.
Open Order Adjustments
Exchanges adjust certain open orders (good-til-cancelled (GTC), stop, limit) for forward stock splits and stock dividends (a reverse split cancels open orders instead):
- Limit buy orders are adjusted: share quantity increases, limit price decreases
- Example: Buy 100 shares at $50 limit becomes buy 200 shares at $25 limit (after a 2:1 split)
- Stop orders are adjusted similarly to reflect the new price levels
- Market orders are NOT affected. They execute at whatever the current market price is (no adjustment needed)
Exam Tip: Gotchas
- Market orders are the exception. After a stock split, GTC limit and stop orders are adjusted by the exchange, but market orders are NOT adjusted because they have no specific price attached. The exam may ask which order types require adjustment.
What Should You Check on Exam Day?
- Can you explain how the OCC adjusts the number of contracts and strike price after a forward stock split?
- Do you know why the total notional value of an options position stays the same after a split adjustment?
- Can you state which order types get adjusted after a forward split, and which type is never adjusted?
- Do you know what happens to open orders after a reverse split, compared to a forward split?