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9) I recently purchased 2 call contracts on Dell with exercise price of $80

Finance Aug 07, 2020

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

Expert Solution

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.

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