How Corporate Actions Affect Your Options Position November 23, 2023

Table summary

Introduction

Have you ever considered what might happen to your options position if a company issues a special cash dividend? Or what about spinoffs? Will you receive the spinoff shares when your options are set to expire? This market journal aims to provide essential information to help you understand how corporate actions can impact your options positions. If you are still curious about the concept of options trading, please visit our previous market journals on US Options and Covered Calls.

Normal Cash Dividend

Let’s start by discussing the regular cash dividend distribution and its potential impact on your options positions. Typically, when a normal cash dividend is issued (for example, on a quarterly or semi-annual basis), the options market prices have already priced in the effects of these dividends. This means that the premium of both call and put options have already factored in the anticipated cash dividend amount. Therefore, there’s usually no need for any modifications to the strike prices, and holders of options will not receive the cash dividend separately. The pricing of options already incorporates the expected impact of the dividend distribution.

Special Cash Dividend

A special dividend is somewhat similar to a regular dividend, but stands out because it’s not a routine occurrence. It’s a special payment that a company makes to its shareholders, breaking from the usual schedule. This is a method for the company to distribute a portion of its assets to its shareholders. Usually, these special dividends come in cash, and occur only once. Now, what will happen to your open options position?

The Options Clearing Corporation (OCC) takes charge of this process and provides a memo on its website. In the situation of a special cash dividend being issued, generally, two scenarios take place.

In scenario A, regarding the memo, options that were initiated before 4 April 2023, the effective date mentioned, will undergo adjustments. The multipliers for these options will stay the same, but the strike prices will all be lowered by $1.00 (the amount of the special cash dividend). Additionally, there won’t be any alterations to the option symbol or its deliverables.

For scenario B, the strike price will remain the same, but there will be alterations to the option symbol and an extra item that will be delivered – the cash distribution. This implies that if you had options for VHC.US that were opened before 18 April 2023, they will be changed to the new symbol, which is VHC1.US. Moreover, there will be changes to what is deliverable in the contract, where each contract will include 100 shares of VHC.US and an additional $100 in cash. Therefore, between the two scenarios, the strike price may be reduced or remain the same with alterations on other details of the contracts.

Liquidation

In the case where the company liquidates and ceases to trade in the market, the shares that make up the contract will turn into the cash-per-share amount the company allocates. The options contract deliverable will then be adjusted accordingly to the company’s cash-per-share amount.

In this example, the symbol and strike price won’t be altered. However, the OCC will move up the contract’s expiration date. For each contract, the items that can be delivered will include $11 (which is the result of multiplying $0.11 by 100), along with any forthcoming liquidating distributions. Additionally, it’s important to note that there could potentially be delays in the settlement process.

Acquisition

When the underlying stock gets acquired and ceases trading in the market, the expiration will be accelerated. The deliverable for the options contract will also be adjusted according to the company’s cash-per-share amount.

In the provided memo example, the deliverable for each contract will be adjusted based on the acquisition process, in this case, $1450 per contract (equivalent to $14.50 x 100). Additionally, the option’s expiration date will be moved up. Similar to the procedures for liquidation, it’s worth noting that there might be possible delays in the settlement process as well.

Cash and Stock Merger

In the event of a cash and stock merger, please note that the ticker of the options contract will change. The number of shares in the contract will also vary based on the merger conditions and deliverables which may include stock along with cash. Both the strike price and expiration date will however remain the same.

As observed in the example, the option symbol for STAR will be updated to SAFE2. The expiry date and multiplier will remain unchanged. However, the deliverable per contract will be altered. In this example, it will include 15 shares of STHO.US, cash in place of 0.3 fractional STHO.US shares, and 16 shares of SAFE.US.

Ticker Change

During a ticker change, the options contract will change to reflect the new ticker of the underlying stock. Both the strike price and expiration date will, however, remain unchanged.

As indicated in the memo example, the option symbol for ATY.US will be updated to ILLM.US. Consequently, the items that can be delivered per contract will also change to ILLM.US shares instead of ATY.US. It’s important to note that the strike price and other terms of the options will remain unchanged.

Reverse Splits

A reverse split or reverse stock split announcement means that the number of existing shares of stock are consolidated into fewer, higher-priced shares.

During a reverse split, there will be a number that is added to the ticker of the options contract. The number of shares in the contract will also decrease based on the conditions of the reverse split. Both the strike price and expiration date will remain unchanged.

In the case of a reverse split on MEIP.US, as seen in the memo example from OCC. The options opened before 17 April 2023, will be adjusted as per the effective date stated on the memo. As stated in the memo, MEIP announced a 1 for 20 reverse stock split, therefore the new deliverable will be reduced from 100 to 5. Additionally, the option symbol will change to MEIP1.

Forward Split

When a forward split occurs, there are normally two types of possible scenarios. Scenario A, when the forward split results in a round number. (e.g. 2 for 1, 5 for 1, 10 for 1) or Scenario B, when the forward split does not result in a round number (5 for 4, or 3 for 2).

For scenario A, CPRT.US options opened before 4 Nov 2022 will be adjusted. Holders of the contract before 4 Nov 2022 will now hold double the number of option contracts in their accounts. However, the strike price will then be divided by 2 and the contract deliverable will remain the same.

In scenario B, as illustrated in the example with PCAR.US in the memo released by OCC, the options positions established before the effective date will undergo adjustments. Subsequently, the option symbol will transition from PCAR.US to PCAR1.US. It’s important to note that the quantity of option contracts held by an individual will remain unaffected. However, since this involves a 3 for 2 stock split, certain changes will occur. The strike price will be divided by 1.5, and simultaneously, the deliverable will be raised from 100 to 150.

Stock Dividend

When the firm pays a stock dividend, the option’s strike price will lower and the number of deliverable shares in the contract will increase by the amount of the dividend. There will also be a symbol change to identify the holder of the option that will be entitled to the stock dividend.

From the example of TR.US, there was a 3% stock dividend issued to TR shareholders. As seen in the OCC memo, options positions opened before the effective date, 3 March 2023 will be adjusted. The option symbol will change from TR.US to TR1.US. Consequently, the strike price will be divided by 1.03 and the contract deliverable will increase to 103 TR.US shares per contract.

Spinoff

In a “spin-off,” a parent company distributes shares of a subsidiary to the parent company’s shareholders making the subsidiary a separate, independent company.

When the firm of the underlying stock in an option contract announces a spinoff, the number of shares in the contract will remain the same. In addition to the existing shares, the new shares paid out by the issuing firm will be included in your contract. During a spin-off, a number will be added to the ticker of the options contract.

As seen in the example, both option symbols T and 2T will be changed to T1 and 2T1. There will be no change to the strike price, multiplier, and the number of contracts. However, the deliverable per contract will be changed depending on the spin-off details as seen in the memo above.

Conclusion

This sums up the information necessary for understanding how corporate actions will impact your options positions.

However, the corporate action scenarios discussed above are provided for informational purposes only and should not be considered an exhaustive list. While every effort has been made to provide accurate and comprehensive information, it is important to recognise that the corporate landscape is dynamic and subjected to change. Therefore, the information presented here may not cover all possible corporate actions or variations that could occur. Users are encouraged to seek professional advice and conduct further research as needed when making decisions related to corporate actions. The information provided should not be construed as financial, legal, or investment advice, and we disclaim any liability for actions taken based on this information. If you’re looking for specific details about the related stock options, visiting the OCC website for the memorandum will provide you with more accurate information.

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