A standard option contract will typically represent a deliverable of 100 shares of stock. However, there are many instances in which an option contract may have its deliverable adjusted to something other than 100 shares. These adjustments will usually stem from some type of corporate action, such as a merger, spinoff, special dividend, or an uneven (i.e., 3 for 2) stock split. Options are not adjusted for regular quarterly dividends.
How Adjustments Work
Option contracts are adjusted in proportion to the adjustment done to the stock. For example, XYZ Corporation declares a special stock dividend of 0.34 shares per common share of stock. In this instance, the deliverable on the option contracts would be adjusted from 100 to 134 shares per contract. While the stock price drops after a dividend, the overall value of the option contracts remains the same because the number of shares each option contract represents is adjusted.
Adjusted Option Symbols
Any option with a deliverable other than 100 shares will have the symbol changed at the time of the corporate action.
The full 21-character symbol that is used by the industry is modified to include the adjustment number behind the stock symbol. For example, an adjusted call option for symbol XYZ at a strike price of 22.50 that expires in January 2011 would be XYZ1110122C000225000. Because of the complexity of the industry symbol, Scottrade uses simpler option symbols. To learn more about option symbols, visit Option Symbols in the Knowledge Center.
The Scottrade displayable symbol will include 'AJ' prior to the Call/Put indicator at the end of the symbol. For example, the symbol for the same contract as above would be XYZ 22.50 Jan 11 AJ1 C. If an additional adjustment occurs during the life of this option, the symbol will remain XYZ 22.50 Jan 11 AJ1 C, but will be further adjusted to reflect the additional corporate action terms. Furthermore, the additional (second) corporate action will also impact the newer listed standard options, which will adjust to XYZ 22.50 Jan 11 AJ2 C.
If you are viewing an option chain for a particular stock on one of Scottrade's trading tools, adjusted contracts will be identified with an asterisk (*) next to the strike price. You can hover your mouse over a strike price, and a pop-up box will appear, indicating the deliverable. This functionality is available on all Scottrade trading tools, with the exception of the Quotes & Research / Detailed Quote area of the Scottrade Trading Site.
Because corporate actions differ from one to the next, it is important to treat each adjustment on a case-by-case basis. The nature of an adjustment to an option is determined by a panel at the Options Clearing Corporation (OCC), which consists of representatives from the OCC and each option exchange that trades the affected option. Specific information on any adjustment can be obtained from the OCC's Web site.
Options involve risk and are not suitable for all investors. Detailed information on our policies and the risks associated with options can be found in the Scottrade Options Application and Agreement, Brokerage Account Agreement, and by downloading the Characteristics and Risks of Standardized Options and Supplements (PDF) from The Options Clearing Corporation, or by requesting a copy from your local branch office. Market volatility, volume, and system availability may impact account access and trade execution. Supporting documentation for any claims will be supplied upon request.