38 lines
2.9 KiB
Plaintext
38 lines
2.9 KiB
Plaintext
a.,,., 1: Definitions 29
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the specific terms of the new option series, in case the broker has overlooked the
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information sent.
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E«ample 1: XYZ is a $50 stock with option striking prices of 45, 50, and 60 for the
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January, April, and July series. It declares a 2-for-l stock split. Usually, in a 2-for-l
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split situation, the number of outstanding option contracts is doubled and the strik
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ing prices are halved. The owner of 5 XYZ January 60 calls becomes the owner of 10
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XYZ January 30 calls. Each call is still for 100 shares of the underlying stock.
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If fractional striking prices arise, the exchange also publishes the quote symbol
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that is to be used to find the price of the new option. The XYZ July 45 call has a sym
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bol ofXYZGI: G stands for July and I is for 45. After the 2-for-l split, one July 45 call
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becomes 2 July 22½ calls. The strike of 22½ is assigned a letter. The exchanges usu
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ally attempt to stay with the standard symbols as much as possible, meaning that X
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would be designated for 22½. Hence, the symbol for the XYZ July 22½ call would be
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XYZGX.
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After the split, XYZ has options with strikes of 22½, 25, and 30. In some cases,
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the option exchange officials may introduce another strike if they feel such a strike is
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necessary; in this example, they might introduce a striking price of 20.
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E«ample 2: UVW Corp. is now trading at 40 with strikes of 35, 40, and 45 for the
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January, April, and July series. UVW declares a 2½ percent stock dividend. The con
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tractually standardized 100 shares is adjusted up to 102, and the striking prices are
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reduced by 2 percent (rounded to the nearest eighth). Thus, the "old" 35 strike
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becomes a "new" strike of 343/s: 1.02 divided into 35 equals 34.314, which is 343/s
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when rounded to the nearest eighth. The "old" 40 strike becomes a "new" strike of
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39¼, and the "old" 45 strike becomes 441/s. Since these new strikes are all fraction
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al, they are given special symbols - probably U, V, and W. Thus, the "old" symbol
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UVWDH (UVW April 40) becomes the "new" symbol UVWDV (UVW April 39¼).
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After the split, the exchange usually opens for trading new strikes of 35, 40, and
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45 - each for 100 shares of the underlying stock. For a while, there are six striking
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prices for UVW options. As time passes, the fractional strikes are eliminated as they
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expire. Since they are not reintroduced, they eventually disappear as long as UVW
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does not issue further stock dividends.
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Example 3: WWW Corp. (symbol WWW) is trading at $120 per share, with strike
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prices of ll0, ll5, 120, 125, and 130. WWW declares a 3-for-l split. In this case, the
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strike prices would be divided by 3 (and rounded to the nearest eighth); the number
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of contracts in every account would be tripled; and each option would still be an
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option on 100 shares of WWW stock. The general rule of thumb is that when a split
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results in round lots (2-for-l, 3-for-l, 4-for-l, etc.), the number of option contracts is |