General Securities Representative (Series 7) Practice Exam

What factor decreases in a reverse odd stock split?

1. Selling price per share

2. Shares per contract

3. Strike price

4. Number of contracts

The correct answer is: Shares per contract

In a reverse odd stock split, the main characteristic at play is that it consolidates a company’s shares, reducing the total number of shares outstanding while increasing the share price proportionally. This consolidation typically affects how stock options are structured, particularly the number of shares represented per contract. In standard option contracts, one contract usually represents 100 shares of the underlying stock. However, in the case of a reverse odd stock split, while the price per share increases, the adjustment in the number of shares per contract occurs to reflect the new share count. Since the reverse split alters the stock structure, it can lead to a situation where the number of shares that one option contract represents becomes less than 100, depending on the specifics of the split. Therefore, the factor that decreases is indeed the shares per contract, as these adjustments are made to maintain parity with the modified stock structure post-split. The pricing mechanisms and the number of contracts may not directly see the same changes as the number of shares reflects. Hence, the decrease in shares per contract is a critical adjustment made during a reverse split to account for the new pricing and share structure.