Newsgroups: misc.invest
Subject: Option Strike Prices
From: saj@phx.mcd.mot.com (Steve James)
Date: 15 Aug 92 04:01:22 GMT
Followup-To: misc.invest
Distribution: na
Organization: Motorola Computer Group, Tempe, Az.
Keywords: options strike prices exchange rules references
Summary: Long/Juicy for US readers

Have you ever seen an option listing (say, in the Wall Street 
Journal (WSJ)) with weird strike prices like, for example, 51 5/8, 
and wondered what was going on?   Two examples from the Fri 14 Aug 
WSJ are Merck (traded on the CBOE) and ADM (traded on the 
Philadelphia Stock Exchange);  there are probably other examples.

What this indicates is that the underlying equity has either split,
(or reverse-split) or paid a dividend in stock, and the option strike 
prices have been adjusted to reflect this.  In the case of ADM, the
stock was 'ex' a 5% stock dividend on Tue 11 Aug.  Wed 12 Aug, most
newspapers, including the WSJ, did not report ADM option prices.
Thu 13 Aug, the last trade price for ADM options at ALL existing 
(but adjusted) strike prices were listed in the WSJ, regardless 
of whether there were any trades in that option in the previous 
day's market session.  (Normally, newspapers do NOT report prices 
of options which did not trade, either as calls or puts, in the 
previous day's trading session.  If the call traded, but not 
the put, the put prices will be a footnote symbol which 
means "not traded" or "option does not exist", or vice-versa 
if the puts trade but the calls don't.)

So, for example, the WSJ listing for the (adjusted) ADM calls 
and puts on Thu 13 Aug reads as follows (modulus obvious typos 
in the WSJ, and slightly reformated for this article; the actual
option prices are not given, as they are unneccesary for the
purpose of this example):

ADM close Thu 13 Aug 1992 25 3/4

Strike Prices   Aug   Sep   Dec       Aug   Sep   Dec

Calls                                 Puts

19
21 3/8
23 3/4
25
28 5/8

Prior to the stock dividend, strike prices which had been traded 
over the last few months were 22 1/2, 25, 27 1/2, and 30, 
although options at each of these strike prices did not trade 
each day over this period.  

(Note for novices:  USUALLY, option strike prices are at multiples
of $5.00 or $10.00.  For equities priced lower than about $40.00,
it is not unusual to find options with strike prices at multiples
of $2.50, $5.00, and $10.00.  So a strike price of 27.50 is fairly
normal.)

Prices for only the 22 3/4, 25, and 28 5/8 ADM options were reported 
in the Fri 14 Aug WSJ.

If you own or have written options on an equity which splits or
adjusts in this fashion, call the exchanges' 1-800 number.  (You
can get the 1-800 number from 1-800-555-1212.)   The exchange will
answer all your questions, and give you the new letter codes for
the unusual strike prices.  Also, the root option symbol changes
(on the PSE, at least) when the strike prices change in this
fashion.  For example, ADM went from ADM to ADZ for option 
trading purposes.

Even if you do not presently have an options position, by calling
the various options exchanges toll-free you can get all sorts of
interesting information about the nuts and bolts of trading options
on that exchange mailed to you.  (Note for novices:  the material
the exchanges will mail you will explain the letter codes mentioned
above; your broker's material should also explain the letter codes for
both strike price/option/put or call.)  The major US options 
exchanges are:

CBOE  (Chicago Board of Options Exchange)

American Stock Exchange

Philadelphia Stock Exchange
1-800-843-7459

Pacific Exchange

New York Exchange

(If anyone ever gets around to creating a FAQ for misc.invest, 
at least they have the PSE 1-800 number as a datum :) )

Please send me EM or post to the .invest group if you dispute 
the material I have presented as factual.  I am happy to learn
that I am in error about any material posted as factual to this 
news group.

Options trading is a good way to lose your bankroll, especially
if you do not understand the mechanics and mathematical models
of this marketplace.  For instruction on the latter, I recommend:
"Options as a Strategic Investment", 2nd Edition (or later),
McMillan, Lawrence G., New York Institute of Finance, N.Y., N.Y.,
ISBN 0-13-638347-5.  Probably not a cheap book, but you get 
what you pay for.  This post addresses one of the more unusual
cases of the mechanics of options trading, which is not covered
at this level of detail in any reputable text book as far as 
I know.
thx/saj

(p.s.:  has anyone else noticed that the WSJ has suffered from a lot
of typos in, say, about the past six months?   During this period, the
WSJ changed editors, AND typographical conventions.  No big deal, but
for example, the ADM options listings for BOTH Thu 13 Aug and 14 Aug
were WRONG, listing for example strike prices of 24 32/512!)

Disclaimer:  this post is just my own personal expression, and is not
investment advice or a position of my employer.
Newsgroups: misc.invest