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Ask Alan #187: Unusual Strike Prices Examined: A Real-Life Example with ARK Next Generation Internet ETF (NYSE: ARKW)

Alan answers a question posed by Ted, who asks:

Alan,
With ARKW trading at $145.50, I did a STO order for ARKW 1/15/21 $145.00 C at $5.30 on 12/17/20. The option strike price has since changed and is now being reported as a 1/15/21 $143.11 C. I’m not sure what happened. Have you ever encountered something like this?
Best wishes,
Ted

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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

3 Responses to “Ask Alan #187: Unusual Strike Prices Examined: A Real-Life Example with ARK Next Generation Internet ETF (NYSE: ARKW)”

  1. Hoyt T October 15, 2021 9:36 am #

    Hi Alan,

    Good explanation, and very timely.

    ARK Funds are notorious for this.

    I have been selling CSPs on various ARK funds for over a year. Yes, I got caught in the late February-mid-March downdraft.:-) So I have been rolling since February.
    When the situation you described occurs and the strikes are adjusted, I have often found those adjusted strikes seem to “disappear” over time. When I own one of those strikes and go to roll it, the strike is not “traded” and I have to pick a strike that is more “normal” like $1.00 or $0.50 increments.
    Since the adjustment had made no difference in the original position, I ready didn’t pay that much attention. So I really didn’t notice when those oddball strikes rolled off the chain. I guess it must be when the new options are released by the CBOE. Although, that would not explain LEAPS. There must be some formula. I tried to find out by reading the “Rules of Cboe Exchange, Inc.” (Updated as of October 12, 2021) but I couldn’t find it.
    Thanks for your explanation.
    Best wishes,
    Hoyt T

    • Alan Ellman October 19, 2021 8:59 am #

      Hoyt,

      I spoke with a contact I have at the OCC regarding LEAPS adjustments and 1-time special cash dividends. His response:

      Hi Alan,

      This is a good question. Ultimately, my answer has some level of uncertainty because the exchanges make the final decision about expiration and strike listings. However, my expectation would be one of two possibilities:

      1. Strike prices could be reduced while the deliverable of the contract remains 100 shares. In this case, the adjusted contracts would still be considered “standard options”. I would not expect the old LEAPS strikes to be reintroduced because this might result in the intervals between strikes to be very small. The exchanges pay attention to the intervals so I wouldn’t think they would bring back the old strikes in this instance.

      2.Instead of the strike prices being reduced, the deliverable of the contract could change and become 100 shares + dividend amount. In this case, the adjusted contracts would be considered “non-standard” and would have their symbol changed (e.g. XYZ1). Here, I would expect the original LEAPS strikes to be reintroduced as standard options with the symbol XYZ. This would likely happen within a few days of the adjustment.

      It’s hard to say which of the above is more likely to happen, but I feel like I’ve seen #1 more often.

      Alan speaking: I hope this brings a bit of clarity to your inquiry.

      Alan

  2. Hoyt T October 19, 2021 11:34 pm #

    Alan,

    Interesting and educational, but not definitive.
    With ARK I have seen #1 and what it appears to be part of #2 (Here, I would expect the original LEAPS strikes to be reintroduced as standard options with the symbol XYZ. This would likely happen within a few days of the adjustment.) at the same time.
    By that I mean I have certainly seen the strikes adjusted where $100 strike might be $101.47 for example and two or three months later the strikes are back to $100 or $105.
    Thanks for your help.
    Best wishes,
    Hoyt T

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