I have 700 shares of CELG but have written January 2021 100 strike calls against my shares for 5-6$. If CELG closes the acquisition below 100$, would I receive the premium I sold the covered calls at or would I get some new covered call position in the BMY shares I receive? My thought is if they are out of the money they should be worthless.

Recall, the BMY offer is 1 share of BMY plus 50$ cash.



You sold the call so the premium is your, no matter what happens.

If your short call is assigned, you'll sell the stock for $100 and you'll be done with it. This is highly unlikely since CELG is $98, the strike is $100 and the expiration is 16 months away.

Based on the merger terms you provided, you will receive one share of BMY and $50 for each CELG share that you own. The CELG options will be adjusted to reflect these terms. If assigned, you will be required to deliver 100 shares of BMY and $50 cash. If you are not assigned, you'll own the BMY shares and you'll get to keep the $50.

Here's a coincidence for you. In 2008, Celgene acquired Pharmion. The terms of the deal were:

  • Each share of PHRM was converted into the right to receive 0.8367 of a share of CELG common stock, plus $25.00 cash. Cash-in-lieu was provided for fractional CELG shares.

On the date of the merger, all outstanding options were adjusted as follows to requires the receipt or delivery of:

  • 83 shares of CELG Common Stock plus $2,536.81 cash ($2,500.00+ $36.81 cash in lieu of 0.67 fractional share of CELG Common Stock (based on a whole-share price of $54.94 for fractional CELG shares)

You can see how the existing PHRM options were adjusted to reflect the acquisition.

  • Did you happen to mean 50 shares of BMY and 50$ cash? I don't see why I would have to deliver 100 shares of BMY.
    – Danny
    Sep 26 '19 at 17:05
  • My answer was based on your statement that the merger is for 1 share of BMY and $50 cash. A Google search indicates that "Celgene shareholders will receive 1.0 Bristol-Myers share and $50 in cash for each share of Celgene. They will also receive one tradeable Contingent Value Right for each share owned, which will entitle them to a payment for the achievement of certain future regulatory milestones." Sep 26 '19 at 17:11
  • ok I think I finally get it. My brokerage would probably hold the 50$ in cash in a reserve account so I can't take it and use it on something else. Because I would in essence have 700 BMY with -7 contracts against those shares at the 50$ strike but those contracts also require the 50$ cash to close. is that about right?
    – Danny
    Sep 26 '19 at 17:29
  • The OCC has a variety of ways to adjust option contracts. In this case, I think that the strike will remain at $100 and delivery will include 100 shares, $5k, a small amount of cash-in-lieu and the CVR (whatever its terms are). Whether you can utilize the $35k in cash for something else will depend on whether it's a cash account or not. If yes, they'll restrict you from using the $35k of cash. If it's a margin account the a different story. In general, people should be very careful with adjusted options because they can be very confusing. Sep 26 '19 at 18:58

Well, you've already received the premium. The question is whether your options will get exercised or not. If they are exercised before the merger then they will work just like a regular option - if CELG is above the strike the options will be exercised and you'll sell your shares for $100. Otherwise the options will expire worthless.

If there is a merger, then you'll receive BMY shares and $50 cash for each share of CELG you own. You'll also receive new, equivalent replacement options on BMY plus $50 with a $100 strike. If BMY is above $50 at expiry, then you'll sell your BMY shares plus the $50 for $100 (how this actually settles I do not know - you may just give up the shares and keep the net $50). If BMY is below $50, you'll keep your shares and the $50.

Effectively you'll receive shares of BMY, $50 per share of CELG you owned, and a new short call option on BMY with a $50 strike.

  • 1
    Ok I think that's what I was afraid of having happen. I thought I was selling something that gave me some free "time premium" on CELG only. But, it seems more complicated now that I would have a BMY covered call for 2021 and have to wait to see if it closes above 50$. I guess I have to decided if I want to mess around with all of this or just close the option position now.
    – Danny
    Sep 26 '19 at 16:38
  • The current CELG options will continue to exist but they will be adjusted, requiring the receipt or delivery of 100 shares of BMY and $50. If assigned, he gives up both. If not assigned, he keeps both (the $50 is cost basis not profit). He will not give up the shares and keep the $50. Sep 26 '19 at 17:07

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