Impact of reverse split on options (e.g. NT)

[Option Trader]

Perhaps I should know the answer myself, but don't.

NT is undergoing a 10:1 reverse split I believe on December 1. We have a bunch of out of the money call options with a strike price of $5. We were told by the Options Calling Center that the impact of this reverse split on the underlying options would most probably be that each option would represent the right to 10 shares of the stock instead of 100. According to this there should hypothetically be no impact on the valuation of the options.

However, the broker had suggested that the options would also undergo its own reverse split, and that instead of having 100 options, one will now have 10 options, only that each option will be worth 10 times the price.

To me, the first way makes more sense, but would like to verify this is so.

 

[MTE]

If a stock splits 2:1 then it's price gets halved and the options are usually adjusted so that you have twice as many options at half the strike price. With that said, it is reasonable to expect that a 10:1 reverse split will create 10 times less stock at 10 times the price. So you should have 10 times less options (e.g. 10 instead of 100 per contract) at 10 times the strike price. So the strike should go from $5 to $50.

 

[Option Trader]

Very often one sees for non-standard options that they don't represent 100 shares, rather some number less (e.g. 67 or something). If what you are saying is correct, when is it your understanding that this would apply?
EDIT: Note, it would seem that you are saying that instead of being $.10 options, which have only a limited downside, each option will now be $1.00 options with a big downside for each option; I don't think that sounds right.

 

[Tums]

why don't you check with the exchange?
they publish a document for every stock that undergoes a transformation, and details all the changes that will impact the associated options.

 

[mskl]

Quote from Option Trader:



NT is undergoing a 10:1 reverse split I believe on December 1.

I had not heard that - can you provide a link?

If it happens then your $5 calls would become $50 calls with a $10 multiplier.

 

[MTE]

Quote from Option Trader:

Very often one sees for non-standard options that they don't represent 100 shares, rather some number less (e.g. 67 or something). If what you are saying is correct, when is it your understanding that this would apply?
EDIT: Note, it would seem that you are saying that instead of being $.10 options, which have only a limited downside, each option will now be $1.00 options with a big downside for each option; I don't think that sounds right.

Well, it's a $2 stock, once it reverse splits it'll be a $20 stock so how can you reasonably expect the option price to remain constant!? It'll rise proportionately. The contract will become non-standard as it'll represent 10 shares than the usual 100. The strike price must rise as well.

$0.10 on a $2 stock = $1 on a $20 stock.

The net effect will be zero to you. That is, say, you have 100 contracts @ 0.10 each, right now. That means 100*100*0.10=$1,000. After the split, you'll have 100 contracts (10 shares per contract) @ 1.00 each. That means 100*10*1=$1,000.

 

[gnome]

Quote from MTE:

Well, it's a $2 stock, once it reverse splits it'll be a $20 stock so how can you reasonably expect the option price to remain constant!? It'll rise proportionately. The contract will become non-standard as it'll represent 10 shares than the usual 100. The strike price must rise as well.

$0.10 on a $2 stock = $1 on a $20 stock.

The net effect will be zero to you. That is, say, you have 100 contracts @ 0.10 each, right now. That means 100*100*0.10=$1,000. After the split, you'll have 100 contracts (10 shares per contract) @ 1.00 each. That means 100*10*1=$1,000.

Stocks which reverse split often begin an immediate tank-ola from the split-adjusted price? Aren't you concerned about that?

 

[MTE]

Quote from gnome:

Stocks which reverse split often begin an immediate tank-ola from the split-adjusted price? Aren't you concerned about that?

I couldn't care less as I don't have a position in them.

 

[gnome]

Quote from MTE:

I couldn't care less as I don't have a position in them.

Oops... I meant to direct that question to Option Trader...

 

[Option Trader]

Quote from gnome:

Stocks which reverse split often begin an immediate tank-ola from the split-adjusted price? Aren't you concerned about that?

Are you sure of this observation? Alternatively thought, that certain institutional buyers would now view NT as a candidate.