Let's say the deal goes through I will close Jan 1, hypothetically. And I have a Jan 18 short OTM put. What happens between Jan. 1 and Jan. 18? Do I get an early expiration?
Depends on the nature of the takeover and the tender. The OCC will issue a bulletin informing everyone how the options will be treated.
Yeah, I figured that I was just wondering how they do it for OTM shorts. I mean could they somehow go in the money even though the underlying will no longer trade? I can't imagine it would be based on the acquirer's stock price? There must be a method; it can't be ad hoc each time, right?
It depends on how the tender works. It’s not as hoc but it’s different. Typically intent is to make deliverable equal to what default Shareholders get.
Ok, here is an example. Let's say I am short a naked call LEAP with a year to go strike price of 50, and today a tender offer for the stock at 40 ends and the company is acquired by tender. What happens to my LEAP? Closed out at 100 percent profit for me? Do I have to wait the year? Do I have any risk. I can't imagine the LEAP is converted into an options of the acquirer.
So typically with an all cash takeover the options are all accelerated to the takeover date and you are paid in cash for in the money options and out of the moneys are expired. In a takeover with stock your options will be adjusted to the new company and continue to trade typically. As mentioned by others the OCC will publish a memo for each case.
Depends on the terms of the buyout. Two real life examples (I participated in both with options). My # were approximates as I am not smart enough to spell it out exactly: 1. WFM, WholeFood Market took over by AMZN in an all cash deal. In this case the outcome was a fixed amount, all options OTM/ATM to the cash deal = 0, ITM = cash - strike 2. CELG took over by BMY, 1 CELG = $50 + 1 share BMY + 1 CVR. CELG options now tracks BMY + CVR (now BMY-RT) + $50 till expiry. I am an amateur, don't know the math, so let the experts give you the exact numbers.