Hi! I'm new to trading and am interested in a company's warrants... but they were issued before a reverse split. If a warrant is issued before a reverse split are both the exercise price and the conversion rate simultaneously affected by the split or is it only one of the two? for example: in a 10 to 1 RS, does a 1:1 warrant with an exercise price of $1.86 become... a) a 10:1 warrant with a $18.6 exercise price b) 10:1 with a $1.86 strike price c) 1:1 with a $18.6 strike price The filing for the company of interest's RS says the following: "As a result of the reverse stock split, proportional adjustments will be made to the company's outstanding warrants and options." Any help and understanding is greatly appreciated. Thanks!
While a stock split adjusts the price of an option's underlying security, the contract is adjusted so that any changes in price due to the split do not affect the value of the option. Basically in a 10:1 reverse split, the strike price is multiplied by 10, but now it only covers 10 stocks, so all prices of options will stay the same.
Thank you for your reply Romil, so if I understand correctly the warrants would now have an exercise price x10 its original despite the stock currently still trading below the warrant's pre-split exercise price? eg the warrant is now convertible at 10 warrants to 1 share with an exercise price of 18.6
Both the conversion rate and exercise price would be simultaneously changed when the reverse split happens. I don't trade warrants, but they are essentially the same as options. In options trading, since each contract covers 100 shares, now in a 10:1 reverse split they will only cover 10 shares, and simultaneously the strike price is multiplied by 10. For example, a stock is currently $1, and you own a call with a strike price of $1, if the stock then goes to $10 due to a reverse split of 10:1, then your strike price will now be $10, but instead of covering a 100 shares of the underlying it instead covers 10. So basically the strike price is multiped by 10 (the reverse split conversion factor), and the number of shares covered is divided by 10(the reverse split conversion factor). At the end of the day, the value of your option doesn't go up or down due to the reverse split.
