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Let's say I have 100 $15 call contracts for NYSE: GPS (Gap Inc) that expires sometime next year.

Hypothetically, if the company were to announce a leveraged private buyout of the remaining shares at $30/per share - what would happen to my current call contracts?

Would I get fairly compensated from my broker as if I had held genuine shares of the company, as opposed to a derivative instrument? Or would I need to liquidate and exercise my options beforehand or else risk a complete loss?

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In a cash leveraged buyout, expiration is accelerated and the buyout price is the settlement price. Out-of-the-money options would expire worthless and those that are ITM would be worth the difference between the buy out price less the strike price. IOW, the options are valued for a cash settlement of the effective date of the buyout.

The same holds true with bankruptcy and company failure except that zero being the accelerated price.

For an all stock offer or a stock plus cash offer, the options are adjusted to reflect these terms.

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  • In the case of company failure (e.i. due to fraud), will the same processes apply? Or is company failure by bankruptcy vs company failure by fraud treated differently from the prospective of derivative instruments?
    – AlanSTACK
    Oct 8, 2020 at 5:23
  • The reason for share price collapse is irrelevant. If the company goes into bankruptcy proceedings but still exists (perhaps delisted and now trading on the OTC BB), nothing happens to the options and they continue until their natural expiration. If the company ceases to exist then the options are accelerated.
    – Bob Baerker
    Oct 8, 2020 at 11:17
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For those interested in trading Options in the United States, I recommend some familiarity with The Options Industry Council resources.

From: https://www.optionseducation.org/referencelibrary/faq/splits-mergers-spinoffs-bankruptcies

  • I own a September call option for company XYZ. News has come out stating that XYZ is the subject of a cash buyout closing in May. If the merger is approved, what will happen to the call option I own?

When an underlying security is converted into a right to receive a fixed amount of cash, options on that security will generally be adjusted to require the delivery upon exercise of a fixed amount of cash. Additionally, trading in the options will cease when the merger becomes effective. As a result, all options on that security that are not in-the-money become worthless and all that are in-the-money have no time value.

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