This is weird. In my portfolio, I had a buy/write position for a certain company. The call options expire in the next few months.
This company just merged with another company. This morning my portfolio shows the shares are gone. I was not given shares of the company it merged with. Instead, I was given cash at the buyout amount that the two companies agreed to. So, I have no shares in the original company. And I assume those shares not longer exist.
The funny part is that the call options that I sold against those shares still shows up in my portfolio. And the strike price on those options is a lot less than the money I was given for those shares.
So, what will happen to those call options that I am short? My portfolio shows now that I am short those calls, with no shares to back them up…in other words, I am holding some “naked calls” in my portfolio. I believe I am not authorized to sell naked calls.
As for the cash I was given, I have already invested that in another company.
It will be interesting to see how this all turns out, and if I get a call from the broker soon. When the dust is settled, I’ll repost and let you know how it all turns out.
Hi @blacktreechaser,
Personally, I would call and find out now!
Does that help you?
Gene
All holdings and some statistics on my Fool profile page
https://discussion.fool.com/u/gdett2/activity (Click Expand)
Here is the notice I got from the broker (redacted): “Account Number: ####: $#### has been credited to your account due to a Cash Merger that liquidated ### shares of your holdings in ####. This credit is reflected in your account. This notice is for your information only and no action is required by you.” There is no mention at all about the short call options, that are still listed with the original company symbol. If their computers have missed something, and if the holder of these these call options is asleep at the wheel, I think I’ll wait for them to catch it before I call them and bring it to their attention.
Well, let’s say you owned a stock XYZ, and it was trading at $85. And then one day you sold $100 strike call options on that stock. And then a few weeks later, XYZ was acquired for $97 a share in cash. The price of XYZ is now $97, and will forever be $97. Those call options are worthless and will expire worthless.
Now if the shares were acquired for $105, then those call options are worth exactly $5 and will always be worth exactly $5. Since the shares aren’t trading anymore, they will have to be resolved in cash rather than in shares (like most index options are handled). Are those call options trading roughly for the acquisition price minus the strike price? (or for pennies if strike price is under acquisition price)
If the XYZ shares were acquired in return for other shares (of the acquirer) then I suppose they would figure out the ratio and convert the options to the new shares at that ratio. And if it was a combination of stock and cash then the ratio would be different.
It’s an interesting scenario.
Acquisition have happened before in my portfolio, and I get an equal value conversion to shares of the other company. Call options that I have sold against those shares also get converted, to an equal value strike price. Also I have had shares split before. And the call options also get converted to equal value. I have never had the shares cashed out and the call options that I’m short left in place, untouched. I think someone’s computer screwed up. To be honest, I fully expect to have to pay up eventually. But, we’ll see what happens, and how long it takes. I also don’t know the terms of the merger…maybe there is some language in there that deals with how outstanding call and put options will be treated (but I doubt it).
How much do you expect to have to pay up? Was the acquisition price above the strike price?
above by $5 a share.
Then you will probably (almost surely) have to pay that $5 to someone who purchased the option. I’m not sure how it works exactly, not sure if they are allowed to exercise it anytime, or if they only get automatically exercised at expiration, or if they get automatically exercised a few days/weeks after the acquisition deal closes.