Long call in a reverse split
- Thread starter SumZero
- Start date
There's an "adjusted" set of chains that exist (until all the dust settles so to speak) that reflect pre-split price. And a new set that reflect the post split price.
Here check it out on Xerox, they went 1 for 4 two weeks ago. http://www.nasdaq.com/symbol/xrx/option-chain?money=all You'll see two sets for each strike.
I don't have IB, but try that drop down window that says "3 months" and see what pops up.
They trade the same....not OTC or anything. And the bid size/ ask size applies to both of the chains. this happened to me on Under Armour a while back. Confusing. IB should have them though.
Here's a good explanation. http://www.optiontradingpedia.com/adjusted_options.htm
You will have 1x the 20 call with an underlying contract size of 50 (instead of the 100 before)...
That's why they create a different set, because otherwise you would mix up your exposure if you just trade underlying size 50 next to 100...
So, no money to be made by a (reverse) split.... contracts are adjusted to keep the same economic value...
vanzandt, I displayed all maturity and strikes and still nothing below strike 20. Strange. I'll ask IB, anyway, out of curiosity why can't we see those options. Could be useful in the future.
JackRab, thanks. My concern was not in having free money (eheheh) but more if in a 1:2 split for someone holding only 1 call (or 3, or 5, or 7, or any odd number) would mean losing anything or holding a non liquid (or worse, an OTC) product. If size is adjusted by half and still negotiates normally then all should be fine.
JackRab, thanks. My concern was not in having free money (eheheh) but more if in a 1:2 split for someone holding only 1 call (or 3, or 5, or 7, or any odd number) would mean losing anything or holding a non liquid (or worse, an OTC) product. If size is adjusted by half and still negotiates normally then all should be fine.
Ah, following @FSU... apparently they (CBOE) do it differently then in say Europe.
Usually in Europe they adjust the contract size and keep the underlying the same.
In Xerox's case, they create a new stock-basket which is 1/4th of Xerox... and this basket is the new underlying for the old options, which keep 100 underlying size. So upon expiry, if you exercise your call, you will get 100x the Xerox-basket, which is then immediately swapped for the normal Xerox stocks in 4-for-1...
So in the end it's actually the same as in Europe, but harder to understand... probably just to keep someone at his job at CBOE answering questions and writing up elaborate documents and weaving baskets...
Anyway... @SumZero, you are correct in thinking you will be holding a significantly less liquid contract, likely not much trading in those... however, it should be 100% hedgable with the normal options though, except that maybe IB will see this as 2 seperate positions and probably charge you a decent margin...
Usually in Europe they adjust the contract size and keep the underlying the same.
In Xerox's case, they create a new stock-basket which is 1/4th of Xerox... and this basket is the new underlying for the old options, which keep 100 underlying size. So upon expiry, if you exercise your call, you will get 100x the Xerox-basket, which is then immediately swapped for the normal Xerox stocks in 4-for-1...
So in the end it's actually the same as in Europe, but harder to understand... probably just to keep someone at his job at CBOE answering questions and writing up elaborate documents and weaving baskets...
Anyway... @SumZero, you are correct in thinking you will be holding a significantly less liquid contract, likely not much trading in those... however, it should be 100% hedgable with the normal options though, except that maybe IB will see this as 2 seperate positions and probably charge you a decent margin...