Introduction (1 of 22): General Information

Companies whose common stock underlies equity option contracts commonly decide to split their shares, make special stock or cash distributions, and merge with or acquire other companies. Decisions to implement such events are made by the underlying companies themselves, and most often result in fundamental changes in value of currently issued shares.

When companies announce decisions to implement such events, the options industry, i.e. The Options Clearing Corporation (OCC) and the individual exchanges on which equity options are traded, make adjustments to the terms of overlying option contracts as required. For instance, when an underlying stock splits, both the number of shares held by an investor and their price are immediately affected. The terms of option contracts on those shares are modified to reflect these changes. Likewise, when a shareholder's equity in a company changes, such as after a merger or acquisition, modifications to overlying option contracts are made.

This class focuses on how the terms of equity option contracts (including LEAPS®) can be modified to reflect changes in asset value of their underlying shares because of corporate management decisions. You will learn that adjustments can be made to:

• the number of contracts owned or written
• available strike prices
• units of trade
• option symbols
• strike price codes