Options holdings with impending merger + conversion to new listing / class.

[d0rian]

Is there a best-practices school of thought re: what to do with options positions in a company that has announced a merger? Specifically, whether it's just best to close them out before the merger closes, taking a loss to avoid the headache of owning the 'zombie' class those options get converted to?

In my case, I owned a bunch of APHA options. On Friday, APHA shares on the NASDAQ converted to 0.8381 TLRY shares. Straightforward. But all my APHA options positions were converted to a new zombie class of "TLRY1" options. I believe it's the case that no one can open new positions in TLRY1 options, only close existing ones. Meaning that as a holder of long TLRY1 Calls, my only trading counterparties are existing shorts who let their short APHA Calls convert to the same TLRY1 zombie class. (Q: are market-makers exempt from this restriction? They must be, right...because there are still plenty of standing bids/offers for the zombie TLRY1 class?)

This would seem to suck for me. Would it have been smarter to just gradually close out all APHA positions, even at suboptimal prices, to avoid this state of affairs? Conversely, are the weeks leading up to a merger closing a good time to scavenge for retails traders doing exactly that? I.e. looking to unload positions at a loss because they don't want to deal with this headache?

 

[BMK]

I understand why you are calling them "zombie" options. But the technical term is nonstandard options.

I believe it's the case that no one can open new positions in TLRY1 options, only close existing ones.

Which broker are you using? I think you are mistaken when you say that you cannot open new positions. As an experiment, I attempted to place an opening order for a nonstandard TLRY option in my account at TD Ameritrade. I got a message saying that the order could only be placed by calling a representative. But it did not say that I could not open a new position.

With that being said, the volume and liquidity in those nonstandard contracts may well be relatively low. Retail traders of TLRY who do not own any of them will not have much interest in trading them. So you will probably be trading only with market makers and other professionals, and you may be looking at bid/ask spreads that are much wider than the spreads in the standard contracts.

The nonstandard options work just like any other put or call. The only thing nonstandard about them is that the deliverable is 83 shares instead of 100 shares.

If you have sufficient capital, you can get pretty creative.

For example, you could sell short 100 of the nonstandard options, and buy 83 of the standard options, and have a delta neutral position.

Even with smaller amounts of money, you can still find ways to trade those things. For example, if you are long one of the nonstandard calls, you could just short 83 shares of the stock...

BMK

 

[vivaskyliska]

Is there a best-practices school of thought re: what to do with options positions in a company that has announced a merger? Specifically, whether it's just best to close them out before the merger closes, taking a loss to avoid the headache of owning the 'zombie' class those options get converted to?

In my case, I owned a bunch of APHA options. On Friday, APHA shares on the NASDAQ converted to 0.8381 TLRY shares. Straightforward. But all my APHA options positions were converted to a new zombie class of "TLRY1" options. I believe it's the case that no one can open new positions in TLRY1 options, only close existing ones. Meaning that as a holder of long TLRY1 Calls, my only trading counterparties are existing shorts who let their short APHA Calls convert to the same TLRY1 zombie class. (Q: are market-makers exempt from this restriction? They must be, right...because there are still plenty of standing bids/offers for the zombie TLRY1 class?)

This would seem to suck for me. Would it have been smarter to just gradually close out all APHA positions, even at suboptimal prices, to avoid this state of affairs? Conversely, are the weeks leading up to a merger closing a good time to scavenge for retails traders doing exactly that? I.e. looking to unload positions at a loss because they don't want to deal with this headache?

I understand why you are calling them "zombie" options. But the technical term is nonstandard options.



Which broker are you using? I think you are mistaken when you say that you cannot open new positions. As an experiment, I attempted to place an opening order for a nonstandard TLRY option in my account at TD Ameritrade. I got a message saying that the order could only be placed by calling a representative. But it did not say that I could not open a new position.

With that being said, the volume and liquidity in those nonstandard contracts may well be relatively low. Retail traders of TLRY who do not own any of them will not have much interest in trading them. So you will probably be trading only with market makers and other professionals, and you may be looking at bid/ask spreads that are much wider than the spreads in the standard contracts.

The nonstandard options work just like any other put or call. The only thing nonstandard about them is that the deliverable is 83 shares instead of 100 shares.

If you have sufficient capital, you can get pretty creative.

For example, you could sell short 100 of the nonstandard options, and buy 83 of the standard options, and have a delta neutral position.

Even with smaller amounts of money, you can still find ways to trade those things. For example, if you are long one of the nonstandard calls, you could just short 83 shares of the stock...

BMK

Thanks for initiating this topic.
I have been facing the same issue too and still thinking how to go about it.

In my case lately, it's my long call option holding in ELP(Stike=$1.25, Exp=16Jul2021) and AYTU (Strike=$2.5 Exp=20Aug2021).
Liquidity just dies off after the sudden corporate announcements.

Please correct me if my understanding is wrong, I don't think I can do what BMK suggested (to create a delta neutral position by going into short selling a call option position) as there is no liquidity/bid at all in both my cases in ELP and AYTU trades below, right?


I am with TDAmeritrade and my trades look as screenshots below:

ELP:

AYTU:

Thanks.

 

[FSU]

Is there a best-practices school of thought re: what to do with options positions in a company that has announced a merger? Specifically, whether it's just best to close them out before the merger closes, taking a loss to avoid the headache of owning the 'zombie' class those options get converted to?

In my case, I owned a bunch of APHA options. On Friday, APHA shares on the NASDAQ converted to 0.8381 TLRY shares. Straightforward. But all my APHA options positions were converted to a new zombie class of "TLRY1" options. I believe it's the case that no one can open new positions in TLRY1 options, only close existing ones. Meaning that as a holder of long TLRY1 Calls, my only trading counterparties are existing shorts who let their short APHA Calls convert to the same TLRY1 zombie class. (Q: are market-makers exempt from this restriction? They must be, right...because there are still plenty of standing bids/offers for the zombie TLRY1 class?)

This would seem to suck for me. Would it have been smarter to just gradually close out all APHA positions, even at suboptimal prices, to avoid this state of affairs? Conversely, are the weeks leading up to a merger closing a good time to scavenge for retails traders doing exactly that? I.e. looking to unload positions at a loss because they don't want to deal with this headache?

There is no blanket restriction on opening new positions in these adjusted options, although some brokers will not allow it. MM's still provide quotes here, although over time liquidity will most likely diminish.