Is there a way for me to benefit from a call option I bought before a reverse split even if I'm out of the money?

Question

I bought an "option to buy" contract of [email protected] for a 0.10 premium. $60 breakeven for [email protected]. Unfortunately the company had a 1/15 reverse split and now my contract is for 6/100 @0.5. Which is really 6@$8 strike I believe. I'm only assuming $8 because the contract just shows 6/100 @ 0.5. The contract is also locked at 75% loss of premium and is currently worthless as the stock price last closed at $1.69 which is about 0.11 pre split.

My question is.. if I execute the call to buy the shares earlier, will it force the brokerage to sell the shares at strike price? What if the option was naked or the share holder already sold during the weeks sell off after the reverse split? Are both option maker and brokerage on the hook to sell me those shares? If so, will the shares be at 0.5 per or 15 x 0.5 a share? If its 6 @ 0.5 wouldn't it be "in the money" at that price? If it's 6 @ $7-8 wouldn't the seller be liable to sell me their long position or buy 6 shares at the $8 strike to sell them to me? If that's the case wouldn't the current share price have to shoot way up to $8 to repurchase if those shares have already been sold or were naked. Also also wouldn't that person be selling me an extremely in the red stock. That would be like scalping paperhands during shorting attacks correct? Just wondering if somehow I can benefit from my situation? Thank you for your help in advance.

Answer 1

Assuming a 1-for-15 reverse split as you state, the new strike is $0.50 x 15 = $7.50, not $8. The contract is now for 100/15 = 6.667 shares, which I assume is rounded down to 6 shares with the remaining fraction to be settled in cash upon exercise.

Your option position is at a loss (likely to expire worthless) and will remain so unless the stock price rises a lot. It doesn't matter who sold you the option or whether it's covered or not, since there is a central clearinghouse for option exercise that deals with each party separately and absorbs the risk of non-performance.

If you exercise (not execute) the call option, the trade of cash (strike) for shares is done outside the normal auction process of the stock market. The strike may bear no relation to the current market price, which will not "shoot way up".

It would be very foolish to exercise a $7.50 strike call option with the stock price at $1.69. If you did, you would pay $7.50 per share (to a very lucky option seller), but no one else would be trading the stock at that price. If the option seller who was assigned to deliver on your exercise did not already have the shares, they would have to buy them at the current market price, not $7.50.

Answer 2

You've constructed a lot of questions based on a lack of understanding of a reverse split as well as your call position.

A reverse split results in the reduction of outstanding shares and an increase in the price of the underlying security. The owner of the option will have the same number of contracts, but the strike price will increase based on the reverse split value. If the reverse split results in fractional shares, Payment in Lieu of the cash value of the fractional share amount is attached to the contract.

With a 1:15 reverse split, your $0.50 call for 100 shares would now be a $7.50 call for 6 shares with an attached PIL cash value for 2/3 of a share.

It would make no sense to exercise your call to buy shares at $7.50 when the stock is worth $1.69. I do not know if other brokers allow this. Mine doesn't.