I have traded for some time but have not faced stock splits before. With GME’s recent split, I want to know the effect on options.
Do strike prices adjust? What happens to contract sizes? I want to grasp how this works to avoid issues during splits.
Strike prices get divided by split ratio and contracts multiply accordingly.
Stock splits can mess with your head but the math works out in the end. When GME did their split, all the option contracts got adjusted automatically by the exchange.
Basically your position value stays the same but the numbers change. A 4-to-1 split means you get 4 times more contracts at a quarter of the strike price.
The tricky part is liquidity can get weird right after splits happen. Sometimes it takes a few days for trading to normalize again.
I once faced a stock split with Tesla too. I had some call options, and it was confusing.
Strike prices are adjusted based on the split ratio. So if you had a $40 strike, it would turn into a $10 strike after a 4-for-1 split. Your contract size increases as well.
In the end, your overall value does not change. I remember panicking and closing my positions too soon. It taught me to understand splits better before trading.
Contract value remains unchanged after adjustment.
• Strike price: divided by split ratio
• Contract quantity: multiplied by split ratio
• Premium: adjusted proportionally
Example: 100 contracts at $80 strike turns into 400 contracts at $20 strike.