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I recently bought 17 Livongo $150 call options that expire on Aug 14th. LVGO closed yesterday at $144.53. This morning they announced phenomenal earnings and shares reached a high of $167.88 in the pre-market.

Ten minutes after the earnings announcement they announced that they are going to be acquired by Teledoc for .592 shares and $11.33 cash, closing at the end of the 4th qtr. LVGO's price took a huge swing down to $128. Now I am totally screwed on my calls.

I also have calls for 2021 and 2022 that are in-the-money. They too have dropped in value like crazy.

1. What happens to my Aug 14 $150 calls?

2. What happens to my 2021 and 2022 calls when they merge in Dec?

3. Lastly, the share prices have plummeted for both companies. Do I get the .592 at the valuation when they announced + $11.33 or when the deal is done, making it worth less if the share prices haven't recovered? So $11.33 + the difference of the share price at time of close and time of announcement and .592?

This seems very shady to announce right when you announce phenomenal earnings.

  • Thank you for the explanation. I appreciate it greatly. So I need to consider a more balanced approach. One more question is that, why did they announce the merger right at the same time as earnings and mess the stock price? Doesn't that seem shady? Did it go south in a hurry when earnings was exactly what I thought they would be....whacked is right! – joel Aug 6 at 20:54
  • It seems shady because it's not the outcome that you desired. Consider this. Earnings beat Wall Street expectations. Wouldn't the company expect that to be an ideal time to announce a merger? Who would expect that to "mess the stock price?" Based on the price whacking, investors evidently believe TDOC is overpaying for LVGO. It's as simple as that. – Bob Baerker Aug 6 at 22:58
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With both stocks getting whacked, clearly, the market doesn't like this merger.

Your 8/14 $150 calls dropped $7.45 today. If LVGO is below $150 on 8/14, these calls will expire worthless.

When the merger occurs, the option contracts will be adjusted. You will receive 59.2 shares of TDOC per 100 shares of LVGO plus $11.33 in cash. If you multiply .592 times TDOC's today's closing price and add $11.33, it's about $130 and that is roughly the current price of LVGO (small premium). You can reverse engineer the equation to calculate what price TDOC will have to be post merger for your 2021 and 2022 calls to be ITM:

  • Strike Price = (.592 x TDOC) + $11.33

So if your 2021 call is $150, TDOC would have to be above $234 for that call to be ITM.

When you buy options that expire soon (the 8/14 calls), you have to be more right in your bet because there's not much time to recover if the stock moves against you.

Something else worth knowing is that if you have the account approval to short as well as sufficient capital in your account to place the trade, you could have locked in a portion of the gain. However, in this case, you would have made a very nice profit from the price collapse.

An example with made up numbers:

Suppose you paid $10 for the 8/14 call yesterday. Your cost basis is $160. Let's pretend that you sold shares at $165 during the pre-market. You've locked in $5 (It's actually more because the call would have some salvage value when regular hours trading resumed and you closed both positions). That's a good thing if you like a 50+ % gain overnight. Not so much if you think LVGO is going much higher but AFAIC, with expiration looming, take the $5+ and run.

As Paul Harvey (RIP) said, "And now, here's the rest of the story." At $128, your $150 call lost $7.45 but your short stock position taken at $165 would have gained $37. Not bad for a screwed up trade, eh? In this case, defensive action would have paid off nicely.

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