That's usually the case with most brokers and more so with IB. Owning one Jan '10 90 call gives you the right to buy 100 shares of GSF at $90 or $9,000. You cost basis will be $100 (strike plus cost of the call). Based on the info that you provided, upon the completion of the merger, 100 shares of GSF will equal 50 shares of RIG plus $2,600 (which means there's some merger premium in GSF shares). Your Jan '10 90 call will give you the right to buy 50 chares of RIG and receive $2,600 for $9,000. IOW, you'll be paying $7,400 for 50 shares of RIG ($64 + $10) All of this assumes that it's a simple adjustment by the OCC. If they adjust the strike or change any other terms, it's a different story. And don't let the $7,400 throw you. It's an OTM call so obviously the cost basis will be higher than current prices. You concern is that both rise in the next 2+ years. And if it does, you don't have to exercise. You simple sell it to close.
In 5 years of trading options I've never exercised one and don't intend to start, I always cash out. I just want to know what the strike price will be on the new option that expires on Jan 09 and is only equivalent to 50 shares of the new company. I'm sure it will all even out in the wash and as long as the price on the new RIG goes up, it's a safe bet.
Don't say never. For 20+ years, I never exercised a thing. But with IB's free exercise, I found myself in a few situations where the option was trading under parity and it was more profitable to buy/sell the stock and exercise. It doesn't occur often but why give away money when it does?
I've exercised options a bunch of times. Back when I used to trade debit spreads, I'd often let both legs get assigned if the spread was ITM. These days, I trade credit spreads. Still, I'll occasionally close out most of the position and take assignment on one or two contracts if I want the stock, which is the same as exercising the long leg of a debit spread. Also, if you've been trading options for 5 years and you can't afford a couple hundred shares of stock, you have some issues to deal with.
I've never had enough faith to let them auto exercise anything that I was long that was ITM at expiration. I can just imagine that conversation with the broker the Monday post expiration (shudder)
Considering that they were ITM debit spreads, the long leg was 5+ points ITM. I can imagine that conversation with the broker on Monday morning, and I think I know how that story ends. But yeah, that was with my old broker, and there were about two dozen reasons why I eventually left them (in some long-lost list I posted on some Y! option board). In retrospect, I guess I wouldn't put it past them to screw up a DITM auto-exercise.