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Homework answers / question archive / 9) I recently purchased 2 call contracts on Dell with exercise price of $80
9) I recently purchased 2 call contracts on Dell with exercise price of $80. Pretty soon afterward, Dell underwent a 4 for 3 stock split. Will there be an adjustment to my position. If so, describe the exact nature of the adjustment
Yes, there will an adjustment to our call option position.
4 for 3 stock split means for every 3 shares held by the shareholders they get an additional share. And, the price of the shares are decreased proportionally.
The strike price of $80 is adjusted to be equal to $80 * 3/4 = $60
Before the split 2 call contracts controls 200 shares of Dell with strike price of $80.
After the split the number of contracts is increased to 2 * 4/3 = 2.666666666667 or 266.6666666667 shares of Dell
So, that the contract value remains the same.
The contract value before the split: 200 shares of Dell * 80 = $16,000
The contract value after the split: 266.6666666667 shares of Dell * 60 = $16,000
Summary:
After the split, the strike price is decreased to $60 and the number of contracts increased to 2.666666666667.
