question about option affected by stock split

Discussion in 'Options' started by fusiforme, May 4, 2013.

  1. Earlier this year I purchased 1 DDD 60 Jan 14 call option for a premium of 13. At the time I bought it this option it was ITM; I didn't purchase this as a trade but with the plan of holding it over time and perhaps exercising it at expiration.

    When DDD split this option was converted in my account to 1 1/2 of the 40 Jan 14.

    At the time I could see that the price being displayed in my positions windows was incorrect. My broker told me to just check the price on the order ticket--that was the correct value.

    The price of DDD collapsed then, but now it has recovered and is trading near 40, the strike price of my option. For awhile, in the last trading session, my option was ITM.

    I checked the order ticket to see the value, expecting to see that I had at last broken even -- only to find that the value displayed was 1/2 less than what I originally paid for it.

    Since it is a LEAPs option, I would not expect time decay to have reduced the value this much. But I am new to options and this is the only one I've held which was affected by a split in the underlying, so I am unclear about what is happening here.

    I would appreciate some feedback from board members, especially if anyone detects a mistake, so I have a better knowledge of how to approach the problem if I need to contact my broker.

    Thanks for your help.
     
  2. Four months, a possible decrease in vol, and an option that was ITM now ATM.

    That could cause the premium to drop.

    Btw- best to look at adjusted options as total value since the contract sizes and position sizes change.
     
  3. thanks for your reply.

    that must be it, but I just wasn't expecting such a severe drop in premium. I have a couple of other options that fell in price and recovered, and both became profitable very soon after they were ITM. It looks like with this one, the stock will need to run for me to break even.

    what do you mean by "total value" here? does this refer to the opportunity for bigger gains (or losses) on a price movement, because of the increased number of shares represented by the contracts, or do you mean something else?
     
  4. Price per share * shares per contract * number of contracts.

    Often the deliverables change from hundred shares to 66 or something.
     
  5. stoic

    stoic

    3D Systems Corporation (DDD) has announced a 3 for 2 stock split. The Ex-distribution Date is February 25, 2013. The Payable Date is February 22, 2013.


    CONTRACT ADJUSTMENT
    Effective Date: February 25, 2013
    Option Symbol: DDD changes to DDD1
    New Multiplier: 150 (e.g., for premium or strike dollar extensions 1.00 will equal $150)
    Contract Multiplier: 1
    Strike Divisor: 1.5
    New Deliverable
    Per Contract: 150 3D Systems Corporation (DDD) Common Shares