General Securities Representative (Series 7) Practice Exam

What increases during an odd stock split?

1. Number of contracts

2. Shares per contract

3. Strike price

4. Investment premium

The correct answer is: Shares per contract

In the case of an odd stock split, the number of shares per contract increases. An odd stock split generally involves dividing existing shares into a greater number of shares than what was originally owned, but not by a standard ratio (such as 2-for-1 or 3-for-1). For example, if a company conducts a 3-for-2 split, shareholders will receive three shares for every two shares they previously held. Since options contracts typically represent a set number of shares, this change in the number of shares owned leads to an adjustment in how many shares are accounted for in each contract. In the context of options, if the underlying stock undergoes an odd split, the number of shares covered by each contract will adjust accordingly to reflect the increased share count. Thus, as the number of shares held by investors increases due to the split, so does the number of shares each options contract represents. This factor is critical for traders and investors to understand, as it affects the value and trading of options related to the underlying stock effortlessly. Other options in the question refer to aspects that do not directly align with the mechanics and outcomes of an odd stock split. For example, the strike price generally does not increase or decrease in relation to a