Very Interesting Options Question

D

da-net

I have been trading options for quite a while, but an interesting situation just came up that I have no idea how it would resolve. Perhaps some of you could shed some light. the situation:

You may be familiar with the acquisition of Neighborcare (NCRX) by Omnicare (OCR). OCR made an all cash offer for NCRX of $34.75 per share and according to the press releases 97+% has been tendered.

Both companies have options. If a seller of Dec NCRX 35 Call options has not closed out the position and the buyer has not closed out the position, then the seller still has an obligation to deliver stock to the buyer at $35 per share until Dec. How can the seller of the option also sell the stock to OCR and be able to fulfill the obligation of delivering the stock should the buyer wish to exercise anytime until Dec.

Since options are a contract for a specified amount of time, they should continue to exist until expiration or exercise. What is your thoughts, Please.
 
Quote from da-net:

What is your thoughts, Please.
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You'd need to check with the exchange as to what their corporate actions policy was, but it's normally cash settled at the option fair value following the offer going unconditional. They would normally take an average IV to determine the option fair value. But as I said, check directly with the exchange.
 
Quote from Profitaker:

You'd need to check with the exchange as to what their corporate actions policy was, but it's normally cash settled at the option fair value following the offer going unconditional. They would normally take an average IV to determine the option fair value. But as I said, check directly with the exchange.
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The OCC is who decides what will happen to options due to a corporate action. Options are adjusted all the time and they are subject to becoming cash-settled-options as ig0r stated.

The settlement adjusts the option's fair value, not the other way around.

Here's the info on your particular situation:

http://www.theocc.com/market/infomemos/2004/jun/19744.pdf

If the offer is $34.75, the 35 calls would be worthless. The seller keeps the premium received.
 
Quote from spreadgod:

If the offer is $34.75, the 35 calls would be worthless. The seller keeps the premium received.
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I only trade the UK so accept that things may be different in the US.

However, in your example above, the 35 calls would have some time value where the offer went unconditional prior to the option expiry date. It is this time value (at least in the UK) that is calculated using an average IV and added to the cash settlement value of the option.

Are you saying that holders of the 35 calls, say 1 year out, with loads of time value remaining, is left holding a worthless option when the bid goes through ???
 
Quote from Profitaker:

I only trade the UK so accept that things may be different in the US.

However, in your example above, the 35 calls would have some time value where the offer went unconditional prior to the option expiry date. It is this time value (at least in the UK) that is calculated using an average IV and added to the cash settlement value of the option.

Are you saying that holders of the 35 calls, say 1 year out, with loads of time value remaining, is left holding a worthless option when the bid goes through ???
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Yes, there can be trades on the options when the offer is unconditional, but once the options become adjusted to a cash settlement, they generally cease trading and there is no more time value that can be had. The stock will no longer be trading at that point, and there is no more money to be made above $34.75, so they are worthless whether they are Leaps or expiring next month. They don't actually expire at that time, but if you are short the option, you can do what's known as a cabinet trade to remove the position from your account.

The options that are in the money will have no time value either.
 
Quote from spreadgod:

so they are worthless whether they are Leaps or expiring next month.
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I would have thought it only right and fair to have a reasonable time value refund, determined similarly to the LIFFE equity options policy.

I'm amazed !

Or am I ?

Actually not !
 
Quote from Profitaker:

I would have thought it only right and fair to have a reasonable time value refund, determined similarly to the LIFFE equity options policy.

I'm amazed !

Or am I ?

Actually not !
More...

Are you serious??? They actually do that in the U.K.?
 
Quote from Profitaker:

spreadgod

See appendix 1: Fair value calculation - for a pure cash offer...

http://www.liffe.com/trade/specs/corpactions.pdf

In particular step 2.
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Wow! You have definitely enlightened me profitaker. I think I'm going to forward that to the OCC and get their take on it.

It makes sense to get some sort of value out of the merger with the other company. Options get adjusted for stock-mergers, why shouldn't all-cash mergers?!

One question. Is the cash settlement adjusted for this Average Implied Volatility? For instance, would the $34.75 cash offer in the example above be adjusted to say a $37.00 cash settlement? Of course, that would make it a losing proposition for the seller. It's almost as if you're taking care of the option buyer over the option seller.

I think I have many more questions about this.
 
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