Lets say you sell an OTM calendar spread sell jan10 10C buy sept08 10C if leh announces the buyout at $10 over the weekend and stock gaps up to ~$8-10. Do those options basically lose most of their premium and only retain the intrinsic value? vs normal behavior where the 10strike calls would gap up per the greeks (delta). Does anyone know? I should paid more attention to the bsc options when they announced the $2 deal.
i am not clear on what you are saying. Lets say the takeover is for cash at $11, monday open leh gaps up to $10.5 Are you saying leh 2010 strike10 calls will be worth only $0.5-$1(the intrinsic value around the $11 buyout price) instead of say $4 ? thanks.
Yes but not 100% guaranteed. Here's why. If the takeover is for CASH, then the value of the underlying stock is <i>never</i> going to be more than $11. But, if a higher bidder comes along before the deal closes, then the stock can move higher. To allow for that possibility the calls may have some premium. But, if it's a 'done dedal' with no chance of anyone else buying the copany at a higher price, then one buck would be the upper limit for the call's price and, the LEAPS 10 call can never be worth more than $1.00. This is true for all expiration months. Once the deal is final and the price is $11/share, all of the $5 strike calls will trade @ $6.00 and the 10 strike calls will trade at $1.00. Higher strike calls would have no bids. Mark
Mark, I have a general question. How about if the takeover is thru stock? Let us say WB taken by WFC. If I have 2009 April WB calls, and the takeover is completed by the end of this year, what will my calls be treated? Thanks.