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I'm trying to figure out how the vol of an option on a target change when the deal is a mix of cash stock.

We know that in a cash deal, vol creeps to 0 as the deal collects approvals. Stock deal, vol tends towards the vol of acquirer.

What about cash and stock? For a concrete case, take the Fox and Disney deal. Half stock, half cash.

Now, I'm not clear how the option settles in such a case. But if you get half cash, and half exposure to stock then to me it seems the implied vol should drop.

Thanks

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Interesting question. I've traded options for decades along with a lot of volatility plays for earnings announcements and I've never experienced this issue. I also learned a long time ago that whenever possible, avoid adjusted contracts because they make my head hurt (g), particularly when there are multiple legs in the position.

I would also surmise that in a cash and equity deal that the cash component would mute the vols of the contract since the equity exposure was diminished. I have two suggestions, the first of which you should ignore.

Find some recent deals where the cash amount was significant. Find the adjusted contracts. Compare the vols to similar strikes of standard 100 share contracts of the acquirer.

Plan B: if you don't get a concrete answer here, Elite Trader has an option BB. It's nearly dead compared to what it was in its heyday. However, there are some professional traders and former option market makers who participate. They're likely to know the answer.

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"Corporate actions such as mergers, acquisitions and spin-offs often necessitate a change to the amount or name of the security deliverable under the terms of the contract. When such adjustments occur, the short call position must deliver the adjusted security at the strike price where the call was sold."

https://www.optionseducation.org/referencelibrary/faq/splits-mergers-spinoffs-bankruptcies

  • What does your answer have to do with the OP's question about what will happen to the implied volatility of the underlying's options after a cash/stock merger? – Bob Baerker Aug 29 at 12:56
  • The OP does say they are not clear about how the option settles, though as more of a side remark than an actual question about how it would. – Ganesh Sittampalam Aug 29 at 13:30

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