Class: Contract Adjustments
OIC Education Program

Introduction: General Information (1 of 26)

Introduction

Companies whose common stock underlies equity option contracts commonly decide to split their shares, make special stock or cash distributions, merge with or acquire other companies and/or reorganize their corporate structures. Decisions to implement such events, collectively called corporate actions, are made by the underlying companies themselves and most often result in fundamental changes in the value of their currently issued shares.

When companies announce decisions to implement such corporate actions, the options industry, i.e. OCC and the individual exchanges on which equity options are traded, make adjustments as needed to the terms of overlying option contracts as required.

For instance, when an underlying stock splits, both the number of shares held by an investor and their price are immediately affected. The terms of option contracts on those shares are adjusted to reflect these changes. Likewise, when shareholder equity in a company changes, as in a merger or acquisition, adjustments to overlying option contracts are made.

This class focuses on how the terms of equity option contracts (including LEAPS®) can be adjusted to reflect changes in asset value of their underlying shares because of corporate management decisions. Adjustments can be made to: