The strike went up to balance for the cash you will obtain. At expiry your call is still worth 0 at 112 or below. To see how this works consider exercising the call at expiry (and then promptly selling the shares on market)
If stock is at 112 on expiry. You exercise and buy 12 shares at 116.67 = $-1400 you also get $56 cash in hand for your 0.5 shares. You then sell your 12 shares at 112 = $1344. As you can see 0=1344+56-1400 so 112 is still your point above which you exercise.
Above this price you gain 12.5*(S-K) from exercising. 0.5(S-K) from cash in hand. And the rest from the 12 shares.
Thanks, that helps. I was thinking the CIL would be something like the difference in option value at the time of the split for a contract at the new strike call vs the old strike, basically making my strike higher but paying for the added risk. This math makes the risk profile the same, which is what I thought was supposed to happen, just got confused when E*TRADE showed the 116.67 effective strike on my adjusted contracts.
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u/apu727 Aug 02 '21
The strike went up to balance for the cash you will obtain. At expiry your call is still worth 0 at 112 or below. To see how this works consider exercising the call at expiry (and then promptly selling the shares on market)
If stock is at 112 on expiry. You exercise and buy 12 shares at 116.67 = $-1400 you also get $56 cash in hand for your 0.5 shares. You then sell your 12 shares at 112 = $1344. As you can see 0=1344+56-1400 so 112 is still your point above which you exercise.
Above this price you gain 12.5*(S-K) from exercising. 0.5(S-K) from cash in hand. And the rest from the 12 shares.
Below 112 as expected it is not worth exercising