Call options give you the right to buy a stock at a certain share price. If the stock splits and the share price drops, that could be detrimental to the value of your option contracts. To adjust for the effects of the stock split, your options position will also be changed.

A stock split increases the number of a company's shares and at the same time reduces the share price.

A split is declared with the number of new shares to replace the current outstanding shares. Typical split ratios include 2 for 1, 3 for 1, 3 for 2 and 5 for 2.

A whole number stock split ratio will result in a proportional increase in call options and a proportional decrease in the option strike price.

Whole splits have a "1" in the second part of the ratio, such as 2 for 1, 3 for 1 or 5 for 1. Call option adjustments are handled differently for uneven stocks splits such as 3 for 2 or 5 for 2.

A trader cannot hold a fractional option contract which would be the result if one contract was adjusted in a 3-for-2 ratio. With this type of split, the number of shares a call option covers is increased from the standard shares by the split ratio. The purpose of adjusting option contracts when a stock splits is to keep the value of the options in line with the number of shares and new share price after the split takes effect.

The biggest change if you are holding call options would be the potential for higher commissions if you sell a larger number of contracts. Tim Plaehn has been writing financial, investment and trading articles and blogs since His work has appeared online at Seeking Alpha, Marketwatch.

Plaehn has a bachelor's degree in mathematics from the U. Each week, Zack's e-newsletter will address topics such as retirement, savings, loans, mortgages, tax and investment strategies, and more.

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Visit performance for information about the performance numbers displayed above. Skip to main content. Stock Split Effects A stock split increases the number of a company's shares and at the same time reduces the share price. Whole Splits and Options A whole number stock split ratio will result in a proportional increase in call options and a proportional decrease in the option strike price.

Fractional Stock Splits Call option adjustments are handled differently for uneven stocks splits such as 3 for 2 or 5 for 2.

Effects of Splits on Option Values The purpose of adjusting option contracts when a stock splits is to keep the value of the options in line with the number of shares and new share price after the split takes effect. What Happens to Options During Stock Splits Option Industry Council: The Key to Understanding Stock Splits.

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About the Author Tim Plaehn has been writing financial, investment and trading articles and blogs since Recommended Articles If Most of the Call Options on a Stock Are in the Money Is It Likely That the Stock Price Has Risen? Can You Sell Call Options You Purchased? Selling Call Options for Income How to Exercise Nonqualified Stock Options. Related Articles Does a Stock Split Affect Your Portfolio? Prices After a Stock Split What Does a Limit Order Mean? What Do I Do if the Price of the Stock That I Sold an Option on Goes Above the Strike Price?

How Stock Splits Affect Call Options | Finance - Zacks

What Happens When the Stock Price Is Lower Than the Stock Option Price? Money Sense E-newsletter Each week, Zack's e-newsletter will address topics such as retirement, savings, loans, mortgages, tax and investment strategies, and more.

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