EFTA01353482.pdf

EXAMPLE: An Investor holds a call option covering 100 shares of XYZ stock with an exercise price of $50 resulting In an aggregate exercise price for the contract of $5,000 ($50 x 100). After a 3 for 2 split, the deliverable could be increased to 150 shares while the nominal exer- cise price remained $50. In that case, upon exercise of the adjusted option, the investor would still pay $5,000 ($50 x 100, not $50 x 150), but would receive 150 shares of XYZ stock Instead of 100. Note in the preceding example that, although the number of shares deliverable was adjusted to be 150, the number by which the unadjusted exercise price of $50 was multiplied to determine the total exercise price con- tinued to be 100 rather than 150. Similarly, premium quo- tations would continue to be multiplied by 100 to obtain the total premium to be paid for a single option. Stock Options with Exercise Prices Stated in Psalms:4 In the future, the exchanges may introduce stock options with exercise prices stated in points and decimals (e.g.. 20.15 or 30.80). The following adjustment rules would apply to any series of stock options whose exercise price is stated in points and decimals: When a stock distribution, stock split or stock divi- dend results In the Issuance of one or more whole shares of stock for each outstanding share—such as a 2 for 1 or a 3 for 1 stock split—as a general rule the number of underlying shares will not be adjusted. Instead, the num- ber of outstanding options will be proportionately increased and the exercise price will be proportionately decreased. (See the example of a 2 for 1 stock split under "Stock Options with Exercise Prices Stated in Fractions" above.) Other stock dividends, stock distributions and stock splits may result in an adjustment in the number of under- lying shares and the exercise price. EXAMPLE: An investor bought an XYZ 50 option— either a call or a put—and XYZ Corporation subsequently effected a 3 for 2 stock distribution. Instead of covering 100 shares of stock at an exercise price of $50 a share, each outstanding option could be adjusted to cover 150 shares at an exercise price of $33.33 per share. The aggregate exercise price remains substantially the same before and after the adjustment ($50 x 100 = $5,000 and $33.33 x 150 = $4,999.50). Al? Stock Options As a general rule. adjustments in exercise prices are rounded to the nearest exercise price increment (4 or one cent, as the case may be). and adjustments in the number of underlying shares are rounded down to eliminate frac- tional shares. In the latter case, the property deliverable upon exercise may be adjusted to include the value of the eliminated fractional share, as determined by OCC. 107 CONFIDENTIAL - PURSUANT TOCFEEDDR11OB11M868 P. 6(e) CONFIDENTIAL SDNY_GM_00184052 EFTA01353482