Adjusted Exercise Price

You joined whatever.com as an employee when the stock was trading at exactly $20. You were granted ten thousand options as a kiss on the cheek for joining. The stock did extremely well and went to $50/share, at which point the company announced a two-for-one stock split.

Overnight, once this stock split was effected, the shares went from trading at $50 each...all the way down to $20 each. Had you not read this definition, you might be all bummed out, because what was $30 in the money stock option value off of your $20 strike price, subtracted from the $50 market price, just cratered.

But in fact, no, that's not what happened. The stock split, which means that your shares outstanding split as well––that is, you went from having ten thousand options to having twenty thousand options, and your strike price, which used to be $20, is now $10.

So the day before the stock split, you had $3,000 worth of intrinsic value in your stock option, or ten thousand options times the quantity 50 - 20 = $30. A cool $300,000 in the money the day before the split.

The day after the split, you had twenty-thousand options with your $10 strike, and a $25 stock price.

The math? 20,000 options times $15 of intrinsic value, or in the money option value, to multiply out to being the exact same $300,000 in value you had the day before the stock split.

So yes, stock splits are an overhyped press release. Not something to get all hyped up about.