Options Education

OIC310C: Contract Adjustments

Course Objective:

The objective of the course is to introduce how and when adjustments are made to an option contracts standard terms, who determines the adjustment amounts and the importance of the various dates of when adjustments occur. The course will also review option contracts that are a result of corporate action that will impact options such as; stock splits, special dividends and distributions, mergers and acquisitions.

Who Should Take This Course:

Fundamental and Intermediate students

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Course Description:

"Contract Adjustments" will cover adjustments that are typically made to option contracts as a result of a corporate action. Some examples of a corporate action include: when the underlying stock undergoes a stock split, pays a special cash and/or stock dividend or distribution, or is involved in a merger, acquisition or corporate reorganization.

Course Chapters

Chapter 1 - Introduction

Introduces what types of adjustments are made, when the adjustments are made, and who decides what the adjustment amounts and dates are. The Introduction chapter also covers the importance of the various dates of an adjustment and how they effect the options. This chapter concludes with the explanation of the exercise, assignment, and settlement of the new option contracts, and stresses the importance of understanding adjusted contracts before trading them.

Chapter 2 - Stock Splits

Stock splits and the effects on the value of each contract, share price, strike price, and multipliers are explained. Other topics deal with the actual adjustments, how rounding effects the options, and the decision to exercise are also covered. This chapter then illustrates examples of both even and odd stock splits, and also how reverse splits affect options.

Chapter 3 - Special Dividends and Distributions

This chapter focuses on extraordinary, or "special," dividends and distributions. The student will be exposed to the differences between dividends vs. distributions vs. spin-offs. This chapter has 5 interactive scenarios discussing special cash distribution, special stock distribution, special stock dividend, spin-offs, and rights distributions.

Chapter 4 - Mergers and Acquisitions

This chapter explains the impact on share value of merger or acquisition agreements and how they are implemented. The special risks of call and put writers are discussed, and the chapter finishes with six interactive scenarios. The six scenarios in order are: merger all cash, merger all stock, merger-stock & cash, election merger, two-tier merger, and reorganization.

Chapter 5 - Review and Quizzes

Review of what you have learned and final quizzes.

Course Resources:

Podcasts

OIC201P: An Exploration of Options Pricing

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