39 lines
2.9 KiB
Plaintext
39 lines
2.9 KiB
Plaintext
30 Part I: Basic Properties ol Stock Options
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increased and the strike price is decreased, and each option still represents 100
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shares of the underlying stock.
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In this case, the strikes listed above (110 through 130) would be adjusted to•
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become new strikes: 36.625, 38.375, 40, 41.625, and 43.375. The 40 strike would be
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assigned the standard strike price symbol of the letter H. However, the others would
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need to be designated by the exchange, so U might stand for 38.375, V for 41.625,
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and so forth.
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Example 4: When a split does not result in a round lot, a different adjustment must
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be used for the options. Suppose that AAA Corp. (symbol: AAA) is trading at $60 per
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share and declares a 3-for-2 split. In this case, each option's strike will be multiplied
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by two-thirds (to reflect the 3-for-2 split), but the number of contracts held in an
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account will remain the same and each option will be an option on 150 shares of AAA
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stock.
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Suppose that there were strikes of 55, 60, and 65 preceding this split. After the
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split, AAA common itself would be trading at $40 per share, reflecting the post-split
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3-for-2 adjustment from its previous price of 60. There would be new options with
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strikes of 36.625, 40, and 43.375 (these had been the pre-split strikes of 55, 60, and
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65).
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Since each of these options would be for 150 shares of the underlying stock, the
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exchange creates a new option base symbol for these options, because they no longer
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represent 100 shares of AAA common. Suppose the exchange says that the post-split,
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150-share option contracts will henceforth use the option symbol AAX.
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After the split, the exchange will then list "normal" 100-share options on AAA,
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perhaps with strike prices of 35, 40, and 45. This creates a situation that can some
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times be confusing for traders and can lead to problems. There will actually be two
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options with striking prices of 40 - one for 100 shares and the other for 150 shares.
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Suppose the July contract is being considered. The option with symbol AAAGH is a
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July 40 option on 100 shares of AAA Corp., while the option with symbol AAXGH is
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a July 40 option on 150 shares of AAA Corp. Since option prices are quoted on a per
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share basis, they will have nearly identical price quotes on any quote system (see item
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5). If one is not careful, you might trade the wrong one, thereby incurring a risk that
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you did not intend to take.
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For example, suppose that you sell, as an opening transaction, the AAXGH July
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40 call at a price of 3. Furthermore, suppose that you did not realize that you were
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selling the 150-share option; this was a mistake, but you don't yet realize it. A couple
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of days later, you see that this option is now selling at 13 - a loss of 10 points. You
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might think that you had just lost $1,000, but upon examining your brokerage state
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ment (or confirms, or day trading sheet), you suddenly see that the loss is $1,500 on |