General Securities Representative (Series 7) Practice Exam

In an even stock split, what happens to the strike price?

1. It remains constant

2. It increases

3. It decreases

4. It becomes double

The correct answer is: It decreases

In the case of an even stock split, the strike price of options tied to the stock adjusts to reflect the increase in the number of outstanding shares. When a stock undergoes a split, the company's total market capitalization remains the same, but the number of shares increases, and therefore, the value of each share—and consequently, the strike price for options—decreases. For instance, in a 2-for-1 stock split, each shareholder will own twice as many shares, but each share's price will be halved to maintain the overall value. If an option had a strike price of $50 before the split, after a 2-for-1 split, the strike price would adjust to $25. This ensures that the relative value of the options remains consistent with the stock's market dynamics. Thus, the strike price decreases in proportion to the increase in share quantity following the split, leading to the correct understanding that the strike price decreases.