Contract Split
A contract split occurs when a single financial contract, such as an options or futures contract, is divided into two or more smaller contracts. This process can take place for a variety of reasons, such as adjusting the contract size to accommodate smaller investors or aligning with changes in the underlying asset, like stock splits. A contract split does not change the overall value of the position but adjusts the size and number of contracts to make trading more accessible or flexible.
Example
If a stock undergoes a 2-for-1 split, an options contract that previously controlled 100 shares may be split into two contracts, each controlling 50 shares, to maintain the same overall exposure.
Key points
• A contract split divides a financial contract into smaller contracts.
• It often occurs due to changes in the underlying asset, such as stock splits.
• The overall value of the position remains the same, but the number and size of contracts are adjusted.
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