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!
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 aspinoff, generally the terms of the option contract are modified tomake 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 preferredfor every two shares they currently hold, the deliverable for the contractwill probably be changes from 100 shares of XYZ common to "100 shares ofXYZ 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 dividendsand 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 happensfor regular dividends, so the price of every option always more-or-lessimplicitly 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
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.
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 highas 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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