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T-Mobile and Sprint are officially merging as of today and tomorrow, changing the stock name from S to TMUS1 as of 4/2/20

According to the paper that OCC published (download here),

Until the cash in lieu amount is determined, the underlying price for TMUS1 will be determined as follows:

TMUS1 = 0.10256 (TMUS)

What would happen if I had a put contract, would I be making some absurd amount of money because the price dropped from ~$8 per share to $0.10?

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  • Is it a coincidence that you picked a drop to a value of 10 cents per share or do you think that the .10256 represents price? Adjusted contracts are a real PITA. The short answer to your question is that puts make money when the underlying drops (ignoring secondary factors like time decay and change in implied volatility). An option adjustment does not create a profit. Commented Apr 1, 2020 at 19:05

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Looking around other places and taking from what D Stanely and Bob Baerker said...

S will become TMUS1 as of 4/2/20

Until the cash in lieu amount is determined, the underlying price for TMUS1 will be determined as follows:

TMUS1 = 0.10256 (TMUS)

this above is stating that every Sprint share, now known as TMUS1, will be worth whatever T-Mobile is at multiplied by 0.10256

since T-Mobile (TMUS) is at $85.13 as of writing, S or TMUS1 would be worth about $8.73 at market open on 4/2/20 which is a little above what S was before the merger, $8.62

Going back to the original question, I misinterpreted 0.10256 to be 10.256¢

Thus I would not be making some absurd amount of money, if any.

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  • That math was not your problem, though - if you owned call options you still would not profit from the "increase" in price because the option contracts would be updated to reflect the equivalent strike/amount of the new stock.
    – D Stanley
    Commented Apr 2, 2020 at 12:46
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would I be making some absurd amount of money because the price dropped from ~$8 per share to $0.10?

No - the terms of your S option contract would be changed to create an equivalent option contract on TMUS. So you'd have a new strike price based on the new share price, and you'd have a new quantity to reflect the exchange ratio. Those two effects cancel each other out (modulo any rounding which is covered by the "cash component").

I see that you found and corrected the error in your interpretation of the exchange ratio, but that's not the reason why you wouldn't profit from puts. you wouldn't profit from calls either - option contracts are adjusted in corporate events (including dividend payments) to reflect the equivalent strike and amount of the new stock.

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  • Your answer is correct, sans the OP's reference to a drop in share price to 10 cents. If that were the case, yes, he'd make some absurd amount of money. However, the .10246 is the exchange ratio and I suspect that the OP has made the incorrect assumption that .10246 means price, aka 10 cents. TBD.... Commented Apr 1, 2020 at 19:31

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