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Understanding Adjusted Options


And what the immediate warning means.


Bill writes:

"I have a question about an option. I really don't understand the pricing.

I own stock in Enterprise Products Partners (EPD) so I looked up their calls to see if there would be a good premium available for selling a covered call. In my brokerage account I found that the April 35 call has a bid/ask of $3/$3.80.

This seems too good to be true and I noticed under the strike is (AJ1) this appears to be an adjusted strike price but I'm not sure what this means.

I looked at my virtual trading account at and I cannot get any options quoted in April for EPD.

Can you explain?"

As it turns out, I can explain.

When trading options, always verify the symbol of the option you're trading is identical to the symbol of the other options. In this case, there's a difference.

Your instincts were correct and the CBOE is the place to go for the information you seek. This document describes a merger that occurred last October.

Notice that the symbol for all April options is "TTX," and not "EPD"; that tells you something is different. And you knew that to be true.

Looking at the document above, you see that each TTX call option gives its owner the right to buy 124 shares of EPD by paying the exercise price of $3,000.

Thus, to sell the covered call, you'd have to deliver 124 shares, not 100 shares. That's the reason the option is priced higher than your expectation.

So what does an "adjusted" option mean? It tells you that the terms of the option have been adjusted. That's an immediate warning that the deliverable (what the call owner gets -- or the put owner sells -- by exercising the option and paying (receiving) 100 x the strike price) is NOT 100 shares of stock.

If you do a search in Google of "EPD TTX options," you'll find the information. Keep that in mind the next time you find an adjusted option.

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No positions in stocks mentioned.

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