Question

A put option on 100 shares of Generous Dynamics stock has an exercise price $50.00 per share. GD declares 2 for 1 stock split. What happens to the exercise price and the number of shares underlying the option?

The answer is: Number of shares increases to 200 and the exercise price is reduced to $25.00

Can someone explain why that is the answer?

Answer 1

2 for 1 stock split means 1 stock will be splitted into 2 equal stock in such a way the value of one stock equals to value of 2 stock after split.

Accordingly, no. of share after split in the given question will become 200 shares ( 100 shares x 2) and value of individual share after the split will be:

1 share = 2 shares

100 share = 200 shares

Exercise price:

$50 x 100 shares = new exercise price x 200 shares

$5000 = new execise price x 200 shares

new exercise price = $5000 / 200

= $25.

Hope, the above is clear to you now. Thanks!!