For example: The shareholders of company JKL Inc. have approved a takeover bid
placed by Global Giant Co. As a result, holders of JKL stock will now be
entitled to a 1/2 share of Global Giant for every share of JKL Inc. they own.
Therefore, holders of JKL call options will now be entitled to a deliverable
amount of 50 shares of Global Giant for every contract of JKL that they are
long (100 shares per contract x .5 Global Giant). Investors with short
positions in JKL call options would then be responsible for delivering 50
shares of Global Giant for every call option assigned.
For the sake of this example, a simple conversion ratio was used, though not
all corporate actions result in such clearly defined terms. Often assignment
will require the short position to deliver fractional shares plus cash
equivalent. An adjustment panel consisting of representatives of the listing
options exchanges and OCC (who only votes in case of a tie) makes a
determination whether to adjust an option as a result of a particular
corporate action by applying general adjustment rules. Again, whatever the
terms, the short position has the potential obligation of delivering the
adjusted underlying.
There are several ways that
an investor can confirm that an options contract has been adjusted and
what the terms of the options contract are.
Information Memos
The Options Clearing Corporation (OCC) posts contract adjustment memos
to its website that give detailed information as to how outstanding
option contracts will be adjusted due to a corporate action.
Equity Special Settlement Report
The Options Clearing Corporation provides a report that contains all
options contracts with a non-standard deliverable.
Series and Strikes
The OIC has a page on its web site titled Series and Strikes where by
entering an options root symbol not only can an investor obtain all
series and strikes available for an option but also obtain a description
of the option. The description of the option will usually contain the
adjustment type, such as spin-off, merger, and distribution.
Call 1-888-OPTIONS (678-4667) The Options Industry Council (OIC) call center is
staffed with industry professionals who are well versed in discussing
options contract adjustments and are able to review the specific details
of all option contract adjustments.
Here are two hints that an option has been
adjusted.
The option appears to be "mispriced".
Review the whole option string or chain of options to see if this is
pricing appears for call and puts in all strikes. It is highly unlikely
that mispriced options exist for a whole option class. There are no free
lunches in the financial markets. If they exist, market forces ensure
they do not exist for very long.
Two option root symbols share the same
strike price. In some cases, an adjusted non-standard contract will
appear alongside a standard, 100-share contract. when looking at a
string of option prices for a particular underlying look to see if all
the symbols are identical. These contracts, while having the "same"
strike price will have different option root symbols. In many cases, the
price differences between these two contracts can vary significantly.
XYZ Inc.'s stock was recently trading at .60 cents before undergoing a 1 for
10 reverse stock split and is now trading at $6.00. Is my call option with
a strike of $5 that was outstanding at the time of the reverse split now
in-the-money by $1.00?
No. The call option should not be in-the-money. All XYZ Inc.'s option
contracts that were outstanding on the effective date of the 1 for 10 reverse
split have would be adjusted to reflect the reverse split. An option contract
for a reverse split is typically adjusted as follows:
Strike Price - No change Number of Contracts - No Change Multiplier - Strike Price and Premium Multiplier remains 100 New Deliverable per Contract - 10 shares of XYZ Inc.
The value of 10 NEW shares of XYZ Inc stock @$6.00 per share is $60.00
dollars. The value of the strike price (if exercised) is $500.00. To determine
the point at which the post-split stock needs to be for the $5.00 call to be
in the money, divide the value of the strike ($500.00) by the number of shares
that Underlies the contract (10). This would indicate that the stock would
need to be trading above $50 per share for this adjusted contract to be in the
money. For additional educational information concerning adjustments to
options due to splits and mergers please refer to our
online
interactive classes. You can also view
previous
adjustment memos posted to the
www.optionsclearing.com website.
How are options contracts adjusted for reverse stock splits?
Typically, a 1 for 20 reverse split would cause the option contract to be
adjusted by changing the deliverable to 5 shares of the "new" stock. You can
expect the 'contract multiplier' to remain 100, and of course the option
symbol would most likely change to reflect a change in the deliverable
securities. You may want to take a look at the recent PALM split, which was a
1 for 20 split, to study an actual situation.
I own a September
call option for company XYZ. News has come out stating that XYZ is the
subject of a cash buyout that is expected to close in May. Assuming that the
merger is approved, what can I expect to happen to the call option I own.
When an underlying security is converted into a right to receive a fixed
amount of cash, options on that security will generally be adjusted to require
the delivery upon exercise of a fixed amount of cash, and trading in the
options will ordinarily cease when the merger becomes effective. As a result,
after such an adjustment is made all options on that security that are not in
the money will become worthless and all that are in the money will have no
time value.
An excellent first read on the subject,
this book carefully and completely defines the terminology, explains options
investing step by step, and presents strategies so that it is easy to understand
at each level of risk involved.
Spend less than you earn! People who spend every penny
they make usually end up going broke.......
Take enough risk on the money you save! Playing safe by
putting your money under the mattress or in a savings account
will not make you wealthy..
Remember that.....Fully one-fifth of humanity, some 1.3 billion people,
struggles to survive on less than $1 per day. About 40% of
humanity survives on less than $2 per day. More than a billion
people around the world will go to bed hungry tonight. Life
expectancy in some 32 countries is less than 40 years. If you
have a few extra dollars in your pocket (you don't have to be a
millionaire to make a difference), please share some of your
financial good fortune with others who are in great need.
Think About It... Being in the 'now' brings a freedom, unlike living
in the past or in the future, which is a kind of imprisonment.
This isn't a kind of a denial where you pretend life doesn't have
problems. Life is full of problems, but most of those stresses
and failures are reliving old hurts or worrying about future
concerns. -- Carl Honore
When you 're diagnosed with cancer, you start to
bargain with God: "Let me get through this, and I'll take better
care of myself. I'll get my priorities in order. I'll learn to
live every day to the fullest." Isn't it sad that you have to get
sick before giving yourself permission to live life to the
fullest? -- Robert Schimmel
Look at Life in different & Positive ways
