What Are Non-Standard Options?

Non-standard options are option contracts that have been converted from their original terms as a result of corporate actions involving the underlying security. Events such as stock splits, reverse splits, mergers, acquisitions, special cash dividends, or spinoffs can all require the Options Clearing Corporation (OCC) to adjust an existing option so that the economic value of the contract remains equivalent for the holder.

When an adjustment occurs, the option's deliverables may change from the standard 100 shares. Its strike price and, in some cases, the contract multiplier may also be adjusted. Because these contracts no longer match the standard specifications, they are listed differently in the options chain.

For example: instead of appearing as "ABC" the adjusted contract may appear as "ABC1." A contract displayed as "20 Jan 2023 5/100 ABC1" would indicate that the deliverable has been adjusted to 5 shares, reflected by the "5/100" while the "ABC1" ticker identifies it as a non-standard option. If the underlying stock experiences multiple corporate actions over time, additional rounds of adjustments may be made, leading to designations such as ABC2, ABC3, and so on.

Corporate actions can vary widely, resulting in adjustments to non-standard options that may increase or decrease the deliverable or, in some cases, alter strike prices in non-uniform ways.

For every corporate action that results in a non-standard option, the OCC publishes an official memo describing the exact terms of the adjustment. These memos are publicly available and can be accessed at no cost on the OCC's website.

What are the risks of non-standard options?

• Liquidity risk: Non-standard options often suffer from lower trading volumes compared to standard options, making it harder to exit positions quickly or at favorable prices. This lack of liquidity can increase the risk of loss.

• Complexity and confusion: Adjusted terms may not be immediately obvious in the options chain. For example, a trader might misinterpret the terms of a non-standard option, leading to significant losses if the contract is exercised without understanding the adjusted strike price and deliverable.

• Due diligence: Always review the specific terms of any non-standard option before trading. The Options Clearing Corporation (OCC) issues detailed memos on these adjustments, which are publicly available and provide essential information about the modified terms.

Non-standard options, while valid investment instruments, require careful management due to their unique risks. Traders must ensure they fully understand the adjusted terms before engaging in any transactions involving non-standard options. Always consult the OCC’s public memos and verify the details to avoid unexpected outcomes.

Option trading entails significant risk and is not appropriate for all investors. Option investors can rapidly lose the entire value of their investment in a short period of time and incur permanent loss by expiration date. You need to complete an options trading application and get approval on eligible accounts. Please read the Characteristics and Risks of Standardized Options before trading options.