What will happen to the LEH leap options if taken over

N

newguy05

Lets say you sell an OTM calendar spread

sell jan10 10C
buy sept08 10C

if leh announces the buyout at $10 over the weekend and stock gaps up to ~$8-10. Do those options basically lose most of their premium and only retain the intrinsic value?

vs

normal behavior where the 10strike calls would gap up per the greeks (delta).

Does anyone know? I should paid more attention to the bsc options when they announced the $2 deal.
 
Quote from newguy05:



if leh announces the buyout at $10 over the weekend and stock gaps up to ~$8-10. Do those options basically lose most of their premium and only retain the intrinsic value?

Yes, if the takeover is for cash.

If instead, the holder of 100 LEH shares gets something else: stock, bonds, cash, or any combination thereof, then the LEAPS call option can be exercised to receive that same bundle.

In other words, you get the RIGHT to buy (by paying the strike price) whatever the LEH shareholder gets.

vs

normal behavior where the 10strike calls would gap up per the greeks (delta).

Does anyone know? I should paid more attention to the bsc options when they announced the $2 deal.

This LEAPS options will behave as all LEAPS options do in a takeover situation.

Yes, you have have paid more attention to the BSC options to learn something, but it's not a good idea to buy or sell options when you don't understand all the ramifications of your trade.

Good luck.

Mark
More...
 
i am not clear on what you are saying.

Lets say the takeover is for cash at $11, monday open leh gaps up to $10.5

Are you saying leh 2010 strike10 calls will be worth only $0.5-$1(the intrinsic value around the $11 buyout price) instead of say $4 ?

thanks.
 
Quote from newguy05:

i am not clear on what you are saying.

Lets say the takeover is for cash at $11, monday open leh gaps up to $10.5

Are you saying leh 2010 strike10 calls will be worth only $0.5-$1(the intrinsic value around the $11 buyout price) instead of say $4 ?

thanks.
More...

Yes but not 100% guaranteed. Here's why.

If the takeover is for CASH, then the value of the underlying stock is <i>never</i> going to be more than $11.

But, if a higher bidder comes along before the deal closes, then the stock can move higher. To allow for that possibility the calls may have some premium. But, if it's a 'done dedal' with no chance of anyone else buying the copany at a higher price, then one buck would be the upper limit for the call's price and, the LEAPS 10 call can never be worth more than $1.00.

This is true for all expiration months. Once the deal is final and the price is $11/share, all of the $5 strike calls will trade @ $6.00 and the 10 strike calls will trade at $1.00.

Higher strike calls would have no bids.

Mark
 
Mark, I have a general question. How about if the takeover is thru stock? Let us say WB taken by WFC. If I have 2009 April WB calls, and the takeover is completed by the end of this year, what will my calls be treated? Thanks.
 
You must log in or register to reply here.
Back
Top