What happens to an option if the underlying stock has a 2-for-1 split?
A)There is no change in either the exercise price or in the number of options held.
B)The exercise price will adjust through normal market movements; the number of options will remain the same.
C)The exercise price would become half of what it was and the number of options held would double.
D)The exercise price would double and the number of options held would double.
E)There is no standard rule - each corporation has its own policy.

Question

Quizplus · Accepted Answer

When there is a 2-for-1 stock split, the exercise price of the option will be half of what it was before the split. This is because the number of shares has doubled, which means that the value of each share has halved. Therefore, the exercise price must also be halved to maintain the same relationship between the option strike price and the underlying stock price. Additionally, the number of options held will double since each option gives the holder the right to buy or sell the underlying stock at a fixed price, and the total number of shares has increased by a factor of two.

What Happens to an Option If the Underlying Stock Has