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I have some out of the money options with pretty far off expiry dates (Jan 2013, for example). What happens if the underlying company is acquired before then, while I'm still holding the options? Do they instantly expire worthless? What if if the acquisition price is greater than the strike price?

Let's take a concrete example. Motorola was just acquired by Google, say for $38 per share (I don't know the exact number). Say I had January 2013 call options with a $30 strike price. Obviously right now while Motorola is still trading, I can sell or exercise them, but what about when Motorola stock no longer exists? What if they had a $40 strike price? Would I just be screwed?

Is there any way they could get converted into Google options (I assume not)?

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A lot may depend on the nature of a buyout, sometimes it's is for stock and cash, sometimes just stock, or in the case of this google deal, all cash. Since that deal was used, we'll discuss what happens in a cash buyout.

If the stock price goes high enough before the buyout date to put you in the money, pull the trigger before the settlement date (in some cases, it might be pulled for you, see below). Otherwise, once the buyout occurs you will either be done or may receive adjusted options in the stock of the company that did the buyout (not applicable in a cash buyout).

Typically the price will approach but not exceed the buyout price as the time gets close to the buyout date. If the buyout price is above your option strike price, then you have some hope of being in the money at some point before the buyout; just be sure to exercise in time.

You need to check the fine print on the option contract itself to see if it had some provision that determines what happens in the event of a buyout. That will tell you what happens with your particular options.

For example JoeTaxpayer just amended his answer to include the standard language from CBOE on its options, which if I read it right means if you have options via them you need to check with your broker to see what if any special exercise settlement procedures are being imposed by CBOE in this case.

  • Chuck, in this case, the buyout is all cash. So no re-issued options. There is no contract just the options disclosure from the exchange. These are not employee stock options, they are standard American options traded on public exchange. – JoeTaxpayer Aug 16 '11 at 3:19
  • and does the contract for those say anything at all about what happens in the event of a buyout? if not then you're pretty much toast if the buyout price is below the strike price on your option – Chuck van der Linden Aug 16 '11 at 9:11
  • I added to my answer. You are correct, if buyout is below strike, option is worthless. See the Jan 12 $40 calls. At $38 today, calls over a year out should have some value, and they are trading at 20 cents or so, not the $3 I'd expect. – JoeTaxpayer Aug 17 '11 at 0:30
  • I should have noted that the answer above does not refer to EMPLOYEE stock options, which are an entirely different beast and usually have very different treatment, often depending on if the company doing the acquiring wants to retain the staff of the company being acquired. If so often options are converted based on the offer price in the buyout, and rendered in cash and/or stock (usually stock for the unvested portion of the employee options, which will have it's own vesting period.) – Chuck van der Linden Oct 18 '13 at 17:32
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    Any thoughts on what happens if the buyout is by a private entity? Thinking about what happens if Tesla goes through w/ going private. – Snekse Aug 13 '18 at 15:21
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When the buyout happens, the $30 strike is worth $10, as it's in the money, you get $10 ($1000 per contract). Yes, the $40 strike is pretty worthless, it actually dropped in value today. Some deals are worded as an offer or intention, so a new offer can come in. This appears to be a done deal.

From Chapter 8 of CHARACTERISTICS AND RISKS OF STANDARDIZED OPTIONS - FEB 1994 with supplemental updates 1997 through 2012;

"In certain unusual circumstances, it might not be possible for uncovered call writers of physical delivery stock and stock index options to obtain the underlying equity securities in order to meet their settlement obligations following exercise. This could happen, for example, in the event of a successful tender offer for all or substantially all of the outstanding shares of an underlying security or if trading in an underlying security were enjoined or suspended. In situations of that type, OCC may impose special exercise settlement procedures. These special procedures, applicable only to calls and only when an assigned writer is unable to obtain the underlying security, may involve the suspension of the settlement obligations of the holder and writer and/or the fixing of cash settlement prices in lieu of delivery of the underlying security. In such circumstances, OCC might also prohibit the exercise of puts by holders who would be unable to deliver the underlying security on the exercise settlement date. When special exercise settlement procedures are imposed, OCC will announce to its Clearing Members how settlements are to be handled. Investors may obtain that information from their brokerage firms."

I believe this confirms my observation. Happy to discuss if a reader feels otherwise.

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