<<Essentially, the strike will split and the # of contracts will go up, i.e., 5 contracts at a
$40 Strike will become 10 contracts at a $20 strike on a 2 for 1 split. The more
complicated splits (3:1, 3:2, etc.) can result in odd strikes with contracts for more
then 100 shares (but no one tells you.)>>
I would add that ALL corporate actions, not just splits, (e.g., mergers, acquisitions, spinoffs, etc.) can have an impact on contract structure. As an example, after Telephone spun off Lucent, the T LEAPS actually represented something like 100 shares of T, 32 shares of LU, and $14. There was not really any way for you as an on-line investor to determine this however.
Even if you use a full-service broker, there is a chance you could unknowingly end up with an irregular option because the broker relies upon his firm's "Security Master" (computerized file containing descriptions of all securities) which often will not reflect anything beyond expiration date and strike price.
Some precautionary measures that you can take:
1) Get yourself a chart of expiration month codes and strike price codes (e.g., A is Jan, B is Feb, etc.) and keep it handy when placing orders
2) Compare the symbol of the option you're trading to others in the same expiration period and similar strikes. Symbols should show a logical progression, e.g., LUVEF, LUVEG, LUVEH. Likewise, the prices of a progression of options should flow consistently. If a security is dramatically over or underpriced relative to its neighbor, there could be something unusual with the contract.
3) Check prices in the Journal. If you detect explanatory codes next to a security INVESTIGATE. For example, the GM Jan 00 50s have an "o" next to the security. What the heck is that for?
4) Check your confirms for anomalies in the security description and net amount. If you sell 5 contracts for $1.00 and the net amount shows $750 less commission, you are probably short the equivalent of 750 shares.
Not trying to cause a panic, just trying to make sure that people get the message to "look before you LEAPS". Sorry for the lousy pun...
Chuck |
