Hi,
Just a curious doubt… what happens to existing PUT contracts when a stock is split?
The contracts get adjusted and does not affect the premium in any way. So please do not buy a put option expecting the premiums to increase owing to a stock split.
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When ever any corporate actions like split or bonus takes place F&O lot size and strike prices will be adjusted accordingly so that the net value will remain the same as before the adjustment.
Theoretically these corporate adjustments are just an accounting alteration where the initial and final net values remain the same.
For ex: consider a stock trading at 1000 with lot size 100, total contract value is 1000100=100000.
After stock split in 2 for 1 the new theoretical price should be 500 with lot size 200 to make the new contract value to remain the same as before the split which is at 500200=100000.
To find the new strike price, take the old strike price and divide by the split ratio. In this case the split ratio is 2 so if you are holding an option with 1000 strike price and with lot size of 100 then after split the new strike price would be 500 (old strike/ split ratio=1000/2) with a lot size of 200 (old lot sizesplit ratio 1002).
Always it should be remembered that no corporate action will create any value.
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