What is the effect on options when a company does a reverse split?

Answer 1

When a company does a split or a reverse split, two things happen to the options: The strike price changes; the number of shares change.

For example, if you own an options contract for 100 shares with a strike price of 30 -- then if there is a 2-1 stock split, you will own a contract for 200 shares with a strike price of 15. If it is a one for two reverse stock split, then you will own a contract for 50 shares with a strike price of 60.

Answer 2

A simple split or reverse split will result in a rejigging of the number of shares of the deliverable included in each post-split option contract.

If co. does 2-1 reverse split the old contract for 100 shares now becomes a contract with deliverable of 50.

However, more complex option contracts result when company does a reorg that could include, for example (1) a spinoff of part of itself into a new company with new shares, plus (2) a consolidation of old shares of the parent company.

Option contracts will be rejigged to reflect all this. The clearing corporation decides what the deliverable for the existing options series & classes will be.

In my experience such decisions are very logical.

If, as in the example above, the exchanges also continue to maintain options markets for the parent company now without its spunoff entity and now consolidated, these will become new series and new classes. They will have different symbols but the same expiration dates. They will coexist with the old series & classes until the old series that were farthest out in time (usually LEAPs) eventually expire.

The pricing of such pairs of classes & series will be markedly different. Investors should be careful to understand the difference between them.

The old series (the one with lopsided numbers of shares plus some of the spinoff still included in the deliverable) tend to become illiquid. No new such options are issued, markets are mostly players exiting. Spreads in bid/ask become very large. In my experience, it's best to strategize one's exit as quickly as possible.

Answer 3

A stock split of any kind, reverse or otherwise, has no effect whatsoever on the value of the stock or the option.

You do see a renewed interest in buyers and sellers, because the stock is in the news, but usually it is just a blip on the screen.

Think about it, you have half the amount of stock at double the price. Where is the change in value?

Because of the renewed interest due to simple advertising (stock in the news), and increased short-term volatility, there may be a short-term expansion in premiums, so you might watch for a trading opportunity.