BBD "adjusted" options . . .

Discussion in 'Options' started by bubba1, Jan 27, 2009.

  1. bubba1

    bubba1

    There are some options on BBD (Banco Bradesco ADRs) that I'd like some opinions on. First off, BBD is excellent/well run Brasilian bank with no toxic assets and, in my mind, the only real risk in being long it is the real/usd risk. But I digress.

    There are regular F2010 $12.5 calls and there are F2010 $15.0 calls are for 150 shares and a tiny bit of cash (like $3.00 per cak).

    I don't understand why the premium for the $15 strike (for 150 shares) is so much higher than the premium for the $12.5 strike (for 100 shares ). The 12.5 is quoted 110@150 and the 15.0 is quoted 250@330. ( These are less quotes than the locals' wet dream, but again I digress.) BBD is trading around $9.00, so both strikes are otm. (Full disclosure -- I have a modest vertical bull spread, one-for-one, of the 12.5/15.0 strikes (100x150 shares) on. I'm also long enough shares so that even if the underlying flies straight up through all the strikes, I'm not naked short.

    Isn't the relative value a bit out of line?
     
  2. OK, here's my guess as to what's going on. Last year the OCC began a new way of doing certain types of adjustments. Wiith the new way, you can no longer compare the stock price with the strike to tell if it's in or out of the money.

    If that's the case here, you have to multiply the stock price by the adjustment factor (1.5 since it's a 3:2 split). Therefore, the adjusted 15 call would go ITM at a stock price of 10. However, at 10, the 12-1/2 standard contract would be OTM. Screwy, ain't it ?? ... but that would explain why you're having a "wet dream" over the premiums.

    Go to the CBOE or OCC web site and do a search on BBD and see what the terms of the adjustment are.

    And one other thing. There are no free lunches so any time something looks too good to be true, it is.