Unusual Strike Prices and Contract Adjustments: A Real-Life Example with ARK Next Generation Internet ETF (NYSE: ARKW) – June 21, 2021
We enter a covered call writing trade for a particular strike and then that strike disappears. What happened? Is this a bad dream? Actually, this is a bit unusual but not an extremely rare occurrence. Contract adjustments are associated with corporate events like stock splits, mergers & acquisitions and special 1-time cash and stock dividends. This article will highlight a contract adjustment for ARKW resulting from a special 1-time cash dividend. Thanks to Ted for sharing his trade with our BCI community.
Ted’s trade
- 12/17/2020: Buy ARKW at $145.50
- 12/17/2020: STO the 1/15/2021 $145.00 call at $5.30
- 12/28/2020: The $145.00 strike is changed to a $141.11 strike… why?
Initial structuring of ARKW trade with the Ellman Calculator
The spreadsheet shows an initial 1-month time-value return of 3.3% with a small 0.3% downside protection of that profit.
How to access contract adjustment information
- www.theocc.com
- Search on top left
- Information memos on right side
- Search by keywords (ticker) on left
- Search on bottom
Contract adjustment for ARKW explaining the strike reduction of $1.89
Discussion
Option contract adjustments are the result of corporate events. In the case of ARKW in December of 2020, there was a 1-time special cash dividend of $1.89 which resulted in both a share price and call strike price reduction by the dividend amount. The Options Clearing Corporation makes sure that buyers and sellers of calls and puts are made whole by these adjustments.
Author: Alan Ellman