To an option investor, spin-offs are another form of distribution, and can result in contract adjustments as determined by an adjustment panel.
NOTE: When option contracts are adjusted to include the spun-off shares, generally the market prices of stock in both the issuing company and the spun-off company will be reflected in quoted prices for the overlying adjusted option contracts.
Company XYZ announces a spin-off, or a special distribution of new stock in subsidiary Company ZYX to common shareholders of record on a specific date, the record date. The distribution ratio is one (1) new share of ZYX common stock for each share of XYZ currently owned. The primary stock exchange on which XYZ is listed announces a specific ex-date for this spin-off and declares that XYZ common stock will trade with an accompanying due bill from the record date for this distribution until the day before the ex-date. Shares of ZYX common stock will begin trading on a "when-issued" basis under the symbol ZYX WI effective the record date until the ex-date.
Pursuant to OCC rules, an adjustment panel decides to adjust contract terms for options overlying XYZ stock as follows:
|Adjustments for XYZ Spin-Off of ZYX |
|Number of Contracts ||unchanged |
|Strike Prices ||unchanged |
|Option Symbol ||adjusted to XYZ1 |
|Deliverable (Unit of Trade) ||100 shares XYZ common stock |
100 shares ZYX common stock
|Multiplier ||unchanged (100) |
|Effective date: declared ex-date for the distribution |
For a more thorough description of the above example, please review our Contracts Adjustments course.
Keep in mind, this example is for illustration purposes only. Corporate actions are examined by an adjustment panel who make decisions about option adjustments on a case-by-case basis.