I held 1 put option for 100 shares of USO that expires on May 8. Yesterday, USO underwent an 8:1 reverse stock split. My options are now for USO1 instead of USO, but what does that mean?
The strike price hasn't changed, so does that mean that my option will expire worthless as it's unlikely the stock will drop (significantly) to back below the strike price?
When there is a stock split (forward or reverse), the options are adjusted to reflect the terms of the split. In this case, the new option root symbol for adjusted options is USO1.
Below is the OCC memo that explains the adjusted option. I can't provide the link because since I am registered with the OCC, my name is in the web address link. If you want to see the post at the OCC's web site, google "OCC USO option split".
DATE: APRIL 22, 2020
SUBJECT: UNITED STATES OIL FUND, LP – REVERSE SPLIT
OPTION SYMBOL: USO
NEW SYMBOL: USO1
DATE: 4/29/20
United States Oil Fund, LP (USO) has announced a 1-for-8 reverse stock split. As a result of the reverse stock split, each USO Common Share will be converted into the right to receive 0.125 (New) United States Oil Fund, LP Common Shares. The reverse stock split will become effective before the market open on April 29, 2020. Cash will be paid in lieu of fractional USO shares.
CONTRACT ADJUSTMENT
Effective Date: April 29, 2020
Option Symbol: USO changes to USO1
Contract Multiplier: 1
Strike Divisor: 1
New Multiplier: 100 (e.g., for premium or strike dollar extensions 1.00 will equal $100)
New Deliverable
Per Contract:
1) 12 (New) United States Oil Fund, LP (USO) Common Shares
2) Cash in lieu of 0.5 fractional USO Shares
CUSIP: USO (New): 91232N207
PRICING
Until the cash in lieu amount is determined, the underlying price for USO1 will be determined as follows: USO1 = 0.125 (USO)
DELAYED SETTLEMENT
The USO component of the USO1 deliverable will settle through National Securities Clearing Corporation (NSCC). OCC will delay settlement of the cash portion of the USO1 deliverable until the cash in lieu of fractional USO Shares is determined. Upon determination of the cash in lieu amount, OCC will require Put exercisers and Call assignees to deliver the appropriate cash amount.
Bob gave the technical details, but for the practical result for you, you now have options on a "synthetic" underlier that has a strike price 8X lower than the new USO quote (equivalent to the "old" price).
So if you had, say, a $2 put on 100 shares of USO before, your option is now a $2 put on 100 USO1 shares, which is equivalent to a $16 put on 12 "new" USO shares (plus $8 cash to compensate for the half share that's left over).
Splits do not affect the moneyness of options - if your option was in the money before it's still in the money (modulo changes in price of the new shares). Meaning for a $2 put, if the "new" price of USO is below $16, then the option is in-the-money.
