Lesson Advanced options trading

Adjusted Options

Explore adjusted option contracts and how corporate actions like stock splits and mergers impact your trades.

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Options trading can sometimes throw a curveball, especially when a company goes through significant changes like stock splits/consolidations or mergers. Adjusted options are the market's way of addressing these changes.

This article will explain what adjusted options are, how they come into play during corporate actions, and what traders should know in order to manage their option contracts effectively.

Adjusted options exist when the original terms of the option contract are amended due to a corporate action or reorganization.

Critical parts of the option contract may be changed such as the strike price, symbol, deliverable, and the amount of shares represented by each contract.

Most importantly: An adjusted option may appear to be “in the money” based on its strike price, but due to changes in the deliverable or other option terms, it may not be.

It is critical that you understand the terms of the adjustment before making a trading decision.

The official terms of the contract adjustment are determined by the Montreal Exchange for Canadian options, and the Options Clearing Corporation for U.S. options.

It’s always a good idea to stay up-to-date with any announcements from the underlying issuers when trading options, and consult the appropriate clearing corporation’s notices if you have questions.

How can I tell if an option is adjusted?

Look for the adjusted option icon “A”

Beside the name of the contract in the level 1 quote window, or next to your positions, you will notice a small “A” icon to indicate that the option contract is adjusted.

Check out these examples from the Edge Desktop trading platform.

Level 1 quote window

Adjusted option edge desktop

Securities shown are for illustrative, educational, and visual purposes only, and should not be relied upon as financial advice. The information provided is not intended to be and should not be construed as a recommendation, offer, or solicitation to buy or sell.

Account > Positions tab

adjusted option edge desktop positions

Strike Price Discrepancies:

The strike prices may not always flow coherently with the rest of the options chain. Adjusted options may have strike prices that seem out of place compared to other options. This is because new options contracts may be created after the corporate action with the same strike price as the older adjusted option(s).

Volume and Open Interest:

Adjusted options tend to have lower volume and open interest compared to other options in the same series due to their complexity. Therefore, it’s important to understand the key differences with these contracts before attempting to trade them as they may differ from “regular” options drastically.

Pricing Relative to Underlying:

If the price of the option seems mispriced (or too good to be true) relative to the underlying, an adjustment might have occurred.

Multiple Options at the Same Strike Price:

When multiple calls or puts with the same expiration and same strike price are displayed, it may be indicative of an adjusted option. Look for the “A” icon, or special indicators in the option’s level 1 quote for more clarification.

Remember: The official terms of the contract adjustment are determined by the Montreal Exchange for Canadian options, and the Options Clearing Corporation for U.S. options.

It’s always a good idea to keep up to date with any announcements from the underlying issuers when trading options, and consult the appropriate clearing corporation’s notices if you have questions.

Examples of Adjusted Options

Unsure about the effects of corporate actions on your options? Continue reading for a few practical real-world examples of adjusted options after popular types of corporate actions.

Stock Split (Forward Split)

A forward split is used by a company to increase the number of shares that are outstanding. Shareholders are given more shares, but there is no change to the total value of their shares.

Long/short option holders may see the number of contracts they own multiplied by the same ratio as shareholders. For example, with a 3:1 stock split, the number of option contracts is multiplied by 3, and the strike price is divided by 3.

Example: You hold an XYZ $90 Call trading for $6 - after the 3:1 split you will hold 3 XYZ $30 Calls worth approximately $2 each.

Reverse Split (Consolidation)

A consolidation is used by a company to reduce the number of shares outstanding. Shareholders will be given a reduced number of shares but each share will now be worth more.

Long/short option holders may see that the number of shares represented by each contract will change according to the same ratio as shareholders. For example, with a 1:2 consolidation instead of 100 shares per option contract as the deliverable, it would typically be 50 shares.

Example: You hold an XYZ $50 Put - after the 1:2 consolidation, you may hold one XYZ (1) $50 Put (with a deliverable of 50 shares instead of the typical 100).

Special Cash Dividends

While regularly scheduled dividend payments are often “priced into” options contracts, special dividends can shake things up if they are announced after you've bought or sold an option. In many cases, the strike price of your option may be adjusted downwards to account for the special dividend amount.

For example, if a one-time special cash dividend payment of $10 is made, a call option with a $40 strike price could potentially be adjusted to a $30 strike.

If a company announces a special cash (or even stock) dividend, it’s very important to check the relevant clearing corporation’s (MX or OCC) website for updates about the terms of the options adjustment.

Be aware that companies may label stock or cash payouts to shareholders differently, such as “dividend”, “distribution”, or “spin-off”, and each term can have different tax implications for both the issuing firm and the recipient shareholder.

However, for those trading options, what matters more is if these payouts lead to contract adjustments, not what they are called. Therefore, if a company declares a special stock dividend, a special cash dividend, a distribution, or a spin-off, and you hold an option on that company's stock, keep an eye out for potential contract adjustments.

Questrade does not provide tax or accounting advice. These materials have been prepared for your information only and are not intended to provide, and should not be relied on for, tax or accounting advice. You should consult your own tax and accounting advisors for these matters.

Trading in options is not suitable for many members of the public. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. Transactions in Options carry a high degree of risk. Purchasers and sellers of Options should familiarize themselves with the type of Option (i.e. put or call) which they contemplate trading and the associated risks. For more information, please refer to our complete Options Risk disclosure.

Note: The information in this blog is for information purposes only and should not be used or construed as financial, investment, or tax advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied is made by Questrade, Inc., its affiliates or any other person to its accuracy.

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