Adjusted Exercise Price
What Is the Adjusted Exercise Price?
The adjusted exercise price is a option contract's strike price after adjustments have been made for corporate actions like stock splits or special dividends made to its underlying security. Any time that changes happen to the securities on which options are written, the strike price and delivery quantity of the underlying security must be adjusted likewise to guarantee that neither the long or short holder of the options are negatively impacted.
The adjusted strike price may likewise allude to the strike prices for options written on Ginnie Mae (GNMA) pass through certificates. The interest rates assigned to GNMA go through certificates vary from that of their referred to benchmark rate. Thusly, these rates must be adjusted with the goal that the investor will receive a similar yield.
How an Adjusted Exercise Price Works
Options contract terms must be adjusted assuming that the underlying stock goes through a reorganization that straightforwardly influences the original terms of its options. This can incorporate stock splits, special dividends, and stock dividends. A two-for-one stock split, for example, will bring about two times the number of shares however at half the price. The holder of an option contract because of a two-for-one stock split will subsequently be conceded two times as numerous option contracts however at half the original strike price.
Adjusted exercise prices might bring about fractional strike prices, however will just influence options series that exist prior to the corporate action that caused the adjustment. New series and existing series will likewise have recently made strike prices added that are successfully un-adjusted sometime later.
Note that strike prices are not adjusted for the payment of ordinary dividends, ticker symbol changes, or due to a merger or acquisition.
Illustration of an Adjusted Exercise Price
On the off chance that there is an alternate multiplier for the stock split, similar to a 3:1 stock split, then, at that point, three times as numerous outstanding shares will exist at 33% of their original market price. In this way, options strike prices must be scaled down by 33% too. In this manner you might see strike prices with decimals after them (for example the $40 strike will turn into the $13.333 strike). New strikes, (for example, the $10 and $15 strike) may then be added around the split strikes over the long haul.
A reverse stock split operates the other way, and results in the reduction of outstanding shares with an accompanying increase in the price of the underlying stock. The holder of an option contract will in any case have similar number of contracts however with an increase in strike price in view of the reverse split value. The option contract, notwithstanding, will currently address a decreased number of shares in light of the reverse stock split value.
On the off chance that a stock pays out an extraordinary (special) cash dividend, that isn't paid out on a quarterly or another normal basis, then the strike may likewise be diminished by the dividend amount, however provided that the cash dividend amount surpasses $12.50 per contract. Assuming a company pays a stock dividend — that is, it pays shareholders in extra shares rather than in cash — then the strike price must likewise be discounted by the amount of the dividend's value.
- The adjusted strike price considers trading continuity for holders of an options contract before the corporate action happens that changes the underlying's price or properties.
- An adjusted exercise price obliges technical changes in an option contract's underlying contract like a special dividend or stock split.
- Typically, adjusted exercise prices will exist until an impacted options series lapses, while new strike prices are at the same time added post-hoc.