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Author: commoncents33 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 214646  
Subject: OT: Mungo, Help re: Options Date: 2/22/2013 4:30 AM
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This is a requst for help regarding options, to Mungo--or anyone else who is quite knowledgible regarding them.

If you are the holder of a call option, and the company issues preferred shares to current shareholders, what would happen to the option value?

Related to this (and probably more common): what would happen to the value if a special dividend is issued while you're holding the call. For a spefic example, how much (if any) would the value of the option change if a $10 special dividend is issued?

Thanks in advance!
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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 198989 of 214646
Subject: Re: OT: Mungo, Help re: Options Date: 2/22/2013 9:57 AM
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If you are the holder of a call option, and the company issues preferred
shares to current shareholders, what would happen to the option value?


If the new class of shares is being sold on the open market, generally nothing happens.

If the new shares are sent to all holders of common shares, as with a
spinoff, generally the terms of the option contract are modified to
make the deliverable of the call option both some common and some of the new shares.
Rulings on changes to exchange listed options are issued by the Options
Clearing Corporation, which has a web site detailing such changes http://www.theocc.com/
e.g., if each holder of XYZ is being sent one share of XYZ-P preferred
for every two shares they currently hold, the deliverable for the contract
will probably be changes from 100 shares of XYZ common to "100 shares of
XYZ common plus 50 shares of XYZ-P"
This is for contracts with expiration after the spinoff date, and not for those before it.
For more complicated spinoffs sometimes the deliverable is changed to include a bit of cash.

Related to this (and probably more common): what would happen to the
value if a special dividend is issued while you're holding the call.
For a spefic example, how much (if any) would the value of the option
change if a $10 special dividend is issued?


The price change of the option will technically be decided by the market,
depending entirely on supply and demand.
But the value gets a fair adjustment. In the case of special dividends,
the strike price is adjusted for the amount of the dividend.
That's one reason there is a clear distinction between special dividends
and regular dividends. Regular dividends don't change the strike price.
For example, say you have a call option for XYZ at strike $50.
While you're holding it they declare a special dividend of $10.
The contract will be modified to have an exercise price of $40.
The change in the market value of the option may be more or less than
$10, depending on the usually-irrational market as a whole.

The general rule is that the adjustments are surprisingly fair and most
of these "normal" changes to the underlying security don't help or hurt you.
The main "exception" to keep in mind is that no adjustment happens
for regular dividends, so the price of every option always more-or-less
implicitly includes the market consensus of what the dividends will be prior to expiry.
A big increase in the regular dividend won't necessarily hurt you, but
a big unexpected change in the regular dividend might.

Jim

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Author: kmb123 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 198992 of 214646
Subject: Re: OT: Mungo, Help re: Options Date: 2/22/2013 11:01 AM
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Speaking of options as they relate to Jim:

How do you feel about the INTC Jan '14 options recommended back in Sept?

Company got hammered after last Q results. Still like the idea of rolling them over before expiry and buying the Jan '16?

Dividend seems really appealing but apparently not enough to get off this down slope.

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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 199020 of 214646
Subject: Re: OT: Mungo, Help re: Options Date: 2/23/2013 10:26 AM
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How do you feel about the INTC Jan '14 options recommended back in Sept?

I have a bunch of 'em.
Clearly it hasn't done me any good yet!

Intel isn't my #1 pick, but the margin of safety seems substantial at current prices.
Their margins and therefore ROE in future probably won't be as high
as they were in the past, but it's still a formidable firm and they aren't going anywhere.
Earnings are a bit cyclical but that doesn't bother me.

Jim

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