DATE: March 04, 2013 QUESTION:Can you explain what happens to the Greeks of an option position when a stock splits? ANSWER: When a stock splits, understanding what happens to a stock position is typically quite straightforward. For example, if XYZ stock trades at $60 per share and you own 100 shares, then you have a stock position worth six thousand dollars. If XYZ stock splits 2-for-1, then you would own 200 shares of XYZ, and those shares would trade at $30 per share. Note, your new position of 200 XYZ shares trading at $30 per share still has the same value of six thousand dollars. Now, let’s consider your option position of 4 at-the-money XYZ May 60-strike calls with each call having a total delta of +200 (or +50 each). When XYZ stock splits 2-for-1, your position in 60-strike calls becomes an 8 contract position in 30-strike calls with a total delta of +400 which is calculated by taking the 8 calls times +50 each. To learn more about how the other Greeks of an option position are affected, view this week's segment of "Ask the Institute."
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