Question

how would an option be adjusted in The following situations?

10:1 stock split

25% stock dividend

5% cash dividend

Answer 1

10:1 stock split

In stock split the par value of a share will reduce. If company declares a 10:1 split of stock split; then after split you will get 10 stocks in the place of your one stock but par value will reduce by 1/10.The option contract becomes like- one to buy 10 shares with an exercise price will also reduce by 1/10^th Or new exercise price = old exercise price/10.

25% stock dividend

A stock dividend is the payment to shareholders of additional shares of equity rather than cash amount and par value of a share will remain the same. Declaring a 25% stock dividend means one additional stock for every 4 stock held. Therefore it will increase the number of outstanding shares by 25% and exercise price of the option to be adjusted by reduce it by 25% or new exercise price = old exercise price * (1-25%)

5% cash dividend

There is no effect on option as the terms of an options contract are generally not adjusted for the regular cash dividends.