Adjustments to Securities Subject to Corporate Actions

After a stock split or stock dividend, existing options contracts and open orders must be adjusted to reflect the new share count and price.

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.

Reverse split adjustments:

  • For reverse splits, the OCC typically adjusts the deliverable (number of shares per contract) rather than the number of contracts
  • The strike price and number of contracts may remain the same, but each contract delivers fewer shares
  • These adjusted contracts often get a modified ticker symbol (e.g., ABC becomes ABC1)

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.
  • Reverse split adjusted options get a modified ticker (ABC1). These are non-standard contracts with a different deliverable than the standard 100 shares.
  • The total notional value of adjusted options positions does not change. Whether it is a forward or reverse split, the economics of the position stay the same.

Open Order Adjustments

Exchanges adjust certain open orders (good-til-cancelled (GTC), stop, limit) for stock splits and stock dividends:

  • 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.

Convertible Bond Adjustments

  • Bonds with conversion features may have their conversion ratio adjusted after corporate actions
  • Example: A bond convertible into 50 shares at $20 per share would become convertible into 100 shares at $10 per share after a 2:1 split
  • The total conversion value remains the same