Option Adjustments After Corporate Actions

Option traders who ignore corporate actions learn expensive lessons. That $50 call you bought might become a contract delivering 5 shares at an adjusted $500 strike after a reverse split—or have its strike reduced by $10 after a special dividend you didn't track. The Options Clearing Corporation (OCC) adjusts contracts for stock splits, reverse splits, special dividends, spin-offs, and mergers—but ordinary dividends don't trigger adjustments. The practical consequence: the same-looking option position can represent drastically different economics after corporate actions. Knowing the adjustment rules separates informed options traders from those who wake up to unexpected position values.

Why Adjustments Exist (The OCC's Mandate)

The Options Clearing Corporation has authority to adjust option contracts to maintain their economic equivalence after corporate actions affect the underlying stock. The guiding principle: an option holder's economic position should remain substantially unchanged by corporate actions.

What triggers adjustments:

• Stock dividends and splits
• Reverse splits
• Rights offerings
• Reorganizations and mergers
• Special cash dividends

What doesn't trigger adjustments:

• Ordinary cash dividends (the regular quarterly kind)

The point is: OCC adjustments aim to make you "whole" economically—but the resulting contracts often trade with reduced liquidity and wider bid-ask spreads. Being whole isn't the same as being well-positioned.

Even Splits: The Clean Adjustment (2-for-1, 3-for-1, 4-for-1)

When a company executes an "even" stock split (whole-number ratios), the adjustment formula is straightforward:

The mechanics:

The formula:

• Number of contracts: multiplied by split ratio
• Strike price: divided by split ratio
• Contract multiplier: unchanged at 100

Example: Tesla 3-for-1 split (August 2022)

Pre-split price: $891.29 Post-split price: ~$297

Your position before: 1 call option, $900 strike, 100-share deliverable Your position after: 3 call options, $300 strike, 100-share deliverable each

Economic value preserved:

• Before: Right to buy 100 shares at $900 = $90,000 total exercise cost
• After: Right to buy 300 shares at $300 = $90,000 total exercise cost

The durable lesson: even splits are the cleanest adjustments. You end up with more contracts at proportionally lower strikes. Liquidity typically consolidates on the adjusted strikes after a short transition period.

Odd Splits: The Complicated Adjustment (3-for-2, 5-for-4)

Odd splits (non-integer ratios) create "non-standard" option contracts that deliver something other than 100 shares. These contracts trade differently and often carry liquidity penalties.

The mechanics:

The formula:

• Number of contracts: unchanged
• Strike price: multiplied by adjustment factor (2/3 for 3-for-2)
• Deliverable: adjusted to 150 shares per contract

Why this matters:

Non-standard contracts (anything other than 100-share deliverables) typically trade with:

• Wider bid-ask spreads
• Lower open interest
• Reduced market maker attention
• Confusing pricing on broker platforms

The test: Before entering an options position in a stock with a pending odd split, decide whether you want to hold through the adjustment—or close before the corporate action date.

Reverse Splits: The Deliverable Shrinks

Reverse splits (share consolidations) work the opposite way—and create the most confusion because contracts end up delivering fewer shares than 100.

Example: 1-for-20 reverse split

Your position before: 1 put option, $2 strike, 100-share deliverable Your position after: 1 put option, $40 strike, 5-share deliverable

The formula:

• Number of contracts: unchanged
• Strike price: multiplied by reverse split ratio ($2 × 20 = $40)
• Deliverable: divided by reverse split ratio (100 ÷ 20 = 5 shares)
• Contract multiplier: remains 100 (but applies to 5 shares)

The critical point: Your contract still technically has a "100 multiplier" for calculation purposes, but it delivers only 5 shares. The economic value is preserved, but the contract looks strange:

• Contract value = (Stock price - Strike price) × 5 shares × 1 contract
• Not (Stock price - Strike price) × 100

Many brokers display this confusingly. Always verify the actual deliverable in the OCC adjustment memo, not just the displayed strike and multiplier.

Special Dividends: Strike Price Reduction

Here's where many option traders get surprised: special dividends reduce option strike prices, but ordinary dividends don't.

The rule:

• Ordinary quarterly dividends: No adjustment
• Special or extraordinary dividends: Strike price reduced by dividend amount

Example: Costco $15 special dividend (December 2023)

Before ex-date: $700 strike call option After adjustment: $690 strike call option (reduced by $15 × adjustment factor—typically the full amount for dollar-denominated specials, sometimes slightly less)

Why this matters:

If you sold a covered call at $700 expecting to keep the shares until well above that price, the special dividend effectively lowers your breakeven. The call buyer didn't "win" from the dividend—they're economically equivalent—but your strike is now closer to the money.

Conversely, if you bought puts expecting downside protection at $700, your strike drops to $690. Your downside protection now kicks in at a lower price.

The ordinary dividend trap:

Many new option traders assume dividends always affect options. They don't. That quarterly $0.50 dividend? Your strike stays unchanged. The stock drops by approximately the dividend amount on the ex-date. Your call loses value. Your put gains value. No adjustment happens because this is the expected, recurring dividend flow.

The practical antidote: track ex-dividend dates on your option positions. The day before ex-date, deep in-the-money calls often get exercised to capture dividends (early exercise risk). Understand this isn't about adjustments—it's about exercise economics.

Spin-Offs: Complex Deliverables

When a company spins off a division, option contracts typically adjust to deliver both the parent shares and spin-off shares.

Example: PayPal spin-off from eBay (July 2015)

Before spin-off: eBay call delivers 100 eBay shares After spin-off: Adjusted eBay call delivers 100 eBay shares + [X] PayPal shares

The exact spin-off deliverable depends on the distribution ratio announced by the company. The OCC publishes specific adjustment memos detailing:

• New contract symbol (usually original symbol plus digit, like "EBAY1")
• Adjusted deliverable (both securities)
• Any cash-in-lieu components

The liquidity problem with spin-off adjustments:

Post-spin-off adjusted contracts almost always suffer from:

• Fragmented liquidity (split between adjusted and new contracts)
• Complicated valuation (two underliers to price)
• Wider spreads (market makers less comfortable with complex deliverables)

The practical response: If you hold options through a spin-off, consider closing the adjusted contracts relatively quickly and re-establishing clean positions in the separate parent and spin-off option chains. The liquidity cost of holding adjusted contracts often exceeds the transaction cost of rolling.

Mergers: The Most Variable Outcome

Merger adjustments depend entirely on deal structure. There's no single formula—each deal creates unique adjustment terms.

Possible outcomes:

Example: Microsoft-Activision ($95 all-cash)

Activision options would have been adjusted to deliver:

• $95 per share in cash upon exercise
• Options above $95 strike become worthless (no value in exercising)
• Options below $95 strike have intrinsic value equal to ($95 - strike) per share

The timing nuance:

Adjustments typically occur at deal close, not announcement. Between announcement and close, options still deliver the target company shares—but price reflects deal probability and spread.

This is why merger arbitrage traders often avoid options (or use them carefully): the option's value depends on deal completion probability, not just target price movement.

Reading OCC Adjustment Memos (Your Primary Source)

The OCC publishes Information Memos for every adjustment. These are your authoritative source—not your broker's interface, not financial news, not Reddit.

Where to find them:

• OCC website: theocc.com/Market-Data/Market-Data-Reports/Series-and-Contract-Data/Infomemos
• Search by underlying symbol
• Memos published before corporate action effective date

What to look for:

1. Adjusted contract symbol: Usually original symbol plus number (AAPL1, TSLA2)
2. New deliverable: Exactly how many shares (and which shares) each contract delivers
3. Adjusted strike: The new strike price after adjustment
4. Effective date: When the adjustment applies
5. Cash-in-lieu: Any cash components for fractional shares

The point is: if you have options in a stock undergoing corporate action, read the OCC memo directly. Broker displays are often confusing or delayed. The memo tells you exactly what you own.

Common Mistakes and How to Avoid Them

Detection Signals (Is This Affecting Your Positions?)

You may have corporate-action-affected options if:

• Your position shows a strike price that doesn't match standard increments
• Your contract symbol has a "1" or "2" suffix
• Your broker shows a deliverable other than "100 shares"
• You're having trouble getting fills at reasonable prices
• Your P&L calculation doesn't match your expected strike × shares formula

Checklist: Managing Options Through Corporate Actions

Essential (Before Every Corporate Action)

• Check OCC website for adjustment memo once corporate action announced
• Note new deliverable and adjusted strike
• Decide whether to hold through adjustment or close before effective date
• If holding, verify broker correctly displays adjusted contract terms

High-Impact (For Active Option Traders)

• Track special dividend ex-dates separately from ordinary dividend dates
• Evaluate early exercise risk before ex-dividend dates on deep ITM calls
• Compare liquidity of adjusted contracts vs. rolling to standard contracts
• Adjust your cost basis records for tax purposes

Optional (For Professional Traders)

• Build calendar alerts for corporate action effective dates on all option positions
• Maintain spreadsheet tracking adjusted contract economics vs. standard
• Analyze historical bid-ask spread widening after adjustments

Next Step (Put This Into Practice)

Check whether any of your current option positions are in stocks with pending corporate actions.

How to do it:

1. List tickers where you hold options
2. Search "[ticker] stock split" and "[ticker] special dividend" for each
3. If corporate action pending, go to theocc.com and search for Information Memos
4. Read memo for exact adjustment terms

Interpretation:

• Even split pending: Position will multiply; minimal action needed
• Odd split or reverse split pending: Expect non-standard deliverable; consider closing
• Special dividend pending: Strike will be reduced; update your breakeven analysis
• Spin-off pending: Complex deliverable incoming; likely best to close before

Action: If you find a pending corporate action, decide today whether to close before the effective date or hold through the adjustment. Don't let it surprise you.