Stock Split Effect on Options

Though stock splits have no effect on stocks, they do affect two other factors: Your wallet, and the options market (assuming options are traded on the stock).

What do you mean it affects my wall?!!

Well... Put simply, since you would own an increased number of shares you once did (imagine if the stock split 10-for-1, lol) you would have to pay more in commissions to sell them (or buy the equivalent dollar amount worth before the split) because most discount brokers charge a higher commission on trades in excess of 1,000 shares.

Regarding marketable stock options... The logical assumption of the affect of a stock split on the corresponding options would be that the options are split as well and the holders own twice as many after the split. However, the effect of stock splits on options is slightly more complicated.

Firstly, you have to keep in mind that an option is primarily a tradable contract.

Second, the premium (time value and intrinsic value) ONLY splits by the stock split factor for NEWLY ISSUED contracts. In other words, the old premiums are unaffected by the stock split - only normal factors as volatility and time-decay affect the old options premiums.

Third, the old options continue to trade as well and are not taken off or converted into "split adjusted" amounts by the Options Clearing Corporation. So if you held 100 options contracts at a premium of 0.05 with a striking price of $20, then after the split you'll still own the exact same with no split effect. Some people mistakenly think that the option "splits", and become confused when they see bid premiums of $0.05 existing before the split (as premiums cannot drop below $0.05). This is not the case because the options do NOT split, instead new striking price zones are opened up (in simulation with pre-stock-split strike zones) for trading on the exchange by the O.C.C. as an option is a binding contract by definition. Unlike the underlying stock, the options are unlimited except by market demand.

Lastly, the split only affects new strike zone options which are written (by the seller) after the split. If buyers want to buy the newly opened options or sell newly opened positions they can while also being allowed to trade the old options. However, the old is NOT interchangable for the new.