Equity options typically represent 100 shares of stock per contract. But the landscape changes when a company undergoes significant corporate actions. These corporate actions are what give rise to non-standard options.
Trigger Events for Non-Standard Options
The shift from standard to non-standard options can be sparked by events like splits, reverse splits, spin-offs, special dividends, or other corporate restructurings. These actions alter the underlying securities’ standard terms, leading to adjustments in options contracts. The basic premise is that a buyer or seller of an option maintain the same rights or responsibilities as originally agreed before the corporate action took place.
How Adjustments Are Made
The OCC is the organization responsible for adjusting options contracts after corporate events occur. They will put out memos such as the one shown here that outline how changes are made. In the example, NLY has done a 1-for-4 reverse split and the OCC responds by adjusting the deliverable from 100 shares to 25 shares.
The underlying price for NLY1 is also modified to be ¼ the price of NLY. If NLY is trading at $20 after the reverse-split, that means the $20 strike of NLY will be at the money, but the $5 strike of NLY1 will be at the money.
Implications for Investors
Non-standard options, such as the post-reverse-split NLY options, require careful consideration. The altered contract size (e.g., 25 shares instead of 100) and strike price (¼ the price of NLY) will mean lower liquidity going forward. This is because the OCC will release a standard size options chain (with each contract representing 100 shares) at the same time as the old chain is converted to non-standard. Traders almost always prefer to trade the standard chain so they don’t have to deal with OCC memos, deliverable or strike conversions, etc.
Traders must recalibrate their strategies to account for all this. With each passing day the non-standard chain becomes less liquid and the new standard chain will absorb most of the trading volume. As open interest falls on the non-standard chain it will become increasingly difficult to close positions. Many options traders prefer to close their positions on the non-standard chain and reopen on the new standard chain after events like these.
Non-Standard Options Symbology
Non-standard options will have a 1 appended to the underlying symbol. So instead of NLY, the underlying ticker would be NLY1. Let’s take an example: The NLY January 24, 2024 $15 Call. After the 1-for-4 reverse split, there are now two versions of this call. In the standard chain, the symbol is NLY240119C00015000 and the deliverable is 100 shares, while the non-standard contract now has the symbol NLY1240119C00015000 and the deliverable is only 25 shares. With NLY trading at $20, the standard version of this call is in the money. The non-standard version of the call is not, however, since a $15 price on the non-standard chain represents a $60 strike price in the underlying.
Non-standard Options On Market Data
The option chain formula and option chain endpoint will return both standard and non-standard options. The user will need to filter out standard or non-standard results depending on what data is needed. For finer control, the OPTIONDATA formula can be used to get a quote for the specific contract you need using the option symbol as the input. In the API the option quote endpoint will do the same.