Question on leaps on merging companies

Discussion in 'Options' started by chrismontez, Oct 8, 2007.

  1. Does anyone know how options on a company that is merging with another company are usually handled? I'm trading options on GSF and am looking at some longer term LEAPS than the Jan 08's I have now. GSF is scheduled to merge with RIG by the end of this year and I don't want to pay for time on the 09 LEAPS if the GSF options will be worthless on the new merged company and I will have to either execute them or sell them for cash at the time of the merger. I assume the price of the options would only be the instrinsic value at that time since there would be no time value on an option for the nonexistent GSF. The stock arrangement is $26 plus 1/2 share of the new company for each share of GSF. I don't know how that plays out with options.
  2. ask your broker. then please let us know the reply. this is an interesting issue.
  3. If you have options for delivery of 100 GSF, they will become options for delivery of $2600 plus 50 shares of NewCo. Nothing else will change.
  4. My broker is IB so getting a correct answer from them is impossible, they are useless.
  5. spindr0


    As commiebat indicated, your options will be adjusted to reflect the terms of the merger.

    To get a better idea of how this wroks, you can read about other mergers at:
  6. I knew I could exercise my options prior to the merger and receive the $26/share + 50 shares of the new RIG. I had asked IB about the process on LEAPS and they told me there was no standard procedure and GSF would put out details of how they would handle options when they put out the meger info. I see how other companies did it, but guess I will have to see how GSF handles them. I 'm still not sure about the $26/ share if I elected to just keep my LEAPS on the new company. I 'm assuming the stike price on leaps would be lowered by the $26 and my Jan 90 calls would have a strike price of $64 on the new RIG and be worth 50 shares, not 100 .
  7. Typically the strike price remains the same, and the options are adjusted to require delivery of the cash. You will have the option to buy $2600 plus 50 shares of NewCo for $9000.

    They changed the strike price when MSFT issued its special dividend, but that was the exception rather than the rule.
  8. spindr0


    GSF has nothing to do with how the options are handled. The OCC takes care of that.

    I would not assume anything. The OCC will determine what the adjustment terms are. Regardless of how they proceed, the adjustment will not affect the value of a position. Only option pricing variables will do that (subsequent change in IV, time decay, price change of the new RIG, etc) will do that. My guess is that the strike will remain the same and will involve $2,600 cash plus 50 shares of the new RIG.

    What is more likely to happen at that time is that some noob will show up here not knowing about the adjustment and will be asking about the free lunch available on one of the strikes. That never fails to happen :)
  9. Well now you see why I said getting a correct answer out of IB was next to impossible. I had thought there was a standard procedure before talking to them. So... it sounds like my LEAPS would be protected and they wouldn't loose their value due to the merger. I still can't get me head around how the $26/ share dividend plays into it. If I buy a Jan 09 90 GSF call now for $1000, they sure are not going to pay me $2600. Although I like the long term play on this merger I'd like to know exactly how it will play out. I recently had my TOMO liquidated at $15.45 by the company who decided to buy back all their stock and go private. Unfortunately I had paid in the $20's for it.

    Thanks for the comments.
  10. The call doesn't entitle you to $2600. Owning 100 shares of GSF entitles you to $2600. Owning the call entitles you to buy $2600 (plus some other stuff) for $9000, if and when you want.

    Happy trading.
    #10     Oct 9, 2007