2

Suppose you own KO call options based on a stock. The knock-out level would be at $90, the stock currently is at $100. But then the stock is split 1:2, so suddenly the stock is worth $50.

Do the options become worthless, since the stock's value is below the knock-out level, even though (ideally) the stock did not change in total value?

4

No, the option terms should be adjusted to account for the split. The new knockout price should be $45, the strike price should be halved, and the number of contracts would double.

That said, since knockout options are traded over-the-counter, there's no exchange to regulate that, and so that clause MUST be written into the option contract. If they are not, then (in the US) the issue would need to be resolved between the parties, either in court or out-of-court.

2

In the U.S., all exchange traded options are adjusted when there is a stock split, standard or reverse. This also occurs for other corporate events such as large special dividends and M&A.

For a standard option with a 2:1 split, you'll end up with twice as many contracts at half the original strike price. I would assume that the same treatment holds true for Knock-Out options (all terms halved) but having never traded them, I don't know. And given that they trade OTC rather than on the option exchanges, you have to know the terms of the contract before entering into them.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.