General Securities Representative (Series 7) Practice Exam

What will happen to the number of contracts after a reverse odd stock split?

1. It remains the same

2. It decreases

3. It increases

4. It becomes irrelevant

The correct answer is: It decreases

In the case of a reverse stock split, the total number of outstanding shares decreases while the price per share increases proportionally. For instance, in a 1-for-2 reverse split, every two existing shares are combined into one share. This means that shareholders will have fewer shares after the reverse split, although the total value of their holdings remains the same because the share price should double. When it comes to the number of contracts associated with options trading, a reverse stock split also results in a decrease in the number of contracts. Each options contract typically corresponds to a specific number of shares (usually 100 shares). After a reverse split, the number of shares each contract represents increases, resulting in a reduction of the total number of outstanding contracts. In summary, after a reverse odd stock split, the number of contracts decreases because each contract now corresponds to a larger number of shares. This is a direct result of the reverse split’s fundamental mechanics, making the decrease in contracts the correct answer.