Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 324

So far so good. But splits aren't always this even. What would happen to those holding 1 FAJ contract if Ford were to split 5 for 2. Adjusting the strike price we would get

$50 x 2 / 5 = $20

Since there is no such thing as a partial contract, this is one of those rare cases where a contract would end up with a number other than 100 shares that it normally represents. In this case the new contract would then represent

100 x 5 / 2 = 250 shares

So that 1 FAJ contract would transform into a new contract with a new symbol representing 250 shares of Ford with the strike price of $20 and still expiring in January. And what if the split ratio does not result in an even strike price? for example for a 3 for 2 split, the strike price of $50 would end up at $33.333333.... In that case, normally the strike price is adjusted to the nearest $1/8 (or in the decimal case $0.05) which in this example would be $33 3/8 with the number of represented shares per contract adjusted to 150.

Reverse splits are handled using the same types of adjustments. If Ford reverse splits 1 for 4, then the strike price would be adjusted to $200 and each contract would represent 25 shares of Ford. And if a company goes private or is bought out for cash, all of the outstanding options would be considered expired with cash delivery set for those options which happen to be in the money relative to the per share buyout price. So for example, if Ford is bought out for cash (say by some foreign car company) for $60 per share, the FAJ contracts would expire and the holders would be entitled to a $10 cash premium, but so would the holders of January 2002 call 50 LEAPS who probably had


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