I am confused. I have long term USO (600+ days) options and currently they are trading 20 times lower than the same options that expiring 20 days from now. Should't the long term one have time value + intrinsic value? Both ITM of course. What am I missing here? Are they going bankrupt soon or what?
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I'm not seeing any such examples in the options chain, can you point out what you're looking at?– Hart COCommented May 26, 2020 at 16:31
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1 Answer
USO underwent a 1-for-8 reverse stock split. Because of that, each USO Common Share was converted into the right to receive 0.125 (New) United States Oil Fund, LP Common Shares plus cash in lieu of fractional USO shares.
All existing option contracts were also adjusted to cover 12 (new) USO shares and cash in lieu of 0.5 fractional USO shares. The new root symbol for these adjusted USO contracts is now USO1.
My guess is that you bought your calls before the split and therefore you now own adjusted contracts.
Option contracts created since the reverse split are for 100 shares and therefore they are priced quite differently.
Read this:
answered May 26, 2020 at 16:55
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So, If I understood you correctly If my options were at 4 usd then now my strike price should be 32, and I only able to get 12 shares for each option I own, plus some cash for half of the new share that left over? Commented May 27, 2020 at 14:28
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As I understand it, the strike price remains the same. Here's an example of an uneven reverse split. The mechanics of USO1 should be no different Commented May 27, 2020 at 14:55
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Oh, I got it. So, before I was able to get 100 shares at $4 price, now I am only getting 12, but for the same $4 price. So these options still has some value, I guess. Though it is still weird, at intrinsic value of $21 for each share each option, if exercised should bring in 21*12 but the price is way below that.Or I'm still missing something? Commented May 27, 2020 at 15:00
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To make the calcs easier, let's assume no cash-in-lieu and the adjustment resulted in 12-1/2 shares per contract. Say pre split the shares were $3 and now they're $24 (1:8 split). . So a $3 call allowed you to buy 100 shares at $3 and now, it allows you to buy 12-1/2 shares at $24. 100 times $3 is equal to 12-1/2 times $24. If you look at the quotes for USO1, the $3 calls have some premium, reflecting that they not far from being in-the-money. The 3-1/2s are worth bupkus, suggesting OTM (which they are). Please speak with your broker to verify this, rather than trusting me. Commented May 27, 2020 at 15:25
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I see now, then my first suggestion was right. At 4$ pre split strike price now I need $32 to break even, and I'm only getting 12.5 shares in case I decide to excecute. I assume the market still expects more bumps along the road, since there is still not much of a time value for such a lengthy options expiration. (mine would expire at Dec 22) Commented May 27, 2020 at 15:46