Personal Finance & Money Stack Exchange is a question and answer site for people who want to be financially literate. It only takes a minute to sign up.
Sign up to join this community
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?
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.
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.
