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I have a put option affected by a dividend that has been renamed and no longer traded but is solidly in the money (MBI $8 puts). It appears as worthless in my app. I am considering exercising it. I also investigated selling the option, which makes it pop up this confirmation box:

You’re selling your right to sell 100 shares of MBI and $800.00 for $0.00 by January 19. You’re also paying regulatory fees of $0.03 per contract.

What does the $800 for $0 mean exactly?

Should I exercise this option? I have several contracts, and as it stands are about $200 per in profit.

I jumped on it as a lark when I saw the stock price jump by 1300% in the span of a hour. The puts were .05. The rally looked a little suspicious. I then promptly forgot about them.

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    That quote confuses me. It may be that I don't deal with options, but are you sure that it said "and" rather than "at" or "for"? It looks as if it's saying that you are trying to sell "your right to sell 100 shares for $8 each", being offered absolutely nothing for it, and that even that decision to give it away for free will cost you a fee. Which would make sense if people can't buy the shares for less than $8; in that situation the right to charge $8 for them is worthless.
    – keshlam
    Commented Jan 2 at 5:41
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    @Telfer D. Preston - MBI1 is now the root symbol for options in existence before the dividend. They have been adjusted. Those created after the dividend have the root symbol MBI. With the stock at trading near $5.85, the unadjusted $8 puts are trading at near their ITM value ($2.00x$2.40). Your adjusted Jan 19th $8 put is worthless because the $8 per share dividend is attached to the contract. Commented Jan 2 at 19:44
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    @BobBaerker ok; I'm still not sure how to parse the quoted phrase, though. It would be nice to see a version of the statement with the implied words filled in, just to understand how they expected that to be read.
    – keshlam
    Commented Jan 2 at 19:47
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    @keshlam - The OP owns adjusted MBI puts and doesn't realize what that entails. He thinks that they are ITM and are worth $2.20 (those are the unadjusted options which he does not own). So with all due respect, trying to parse the wording of a conclusion based on incorrect information is a waste of time. And FWIW, wherever possible, I avoid adjusted options because they are a real headache. Commented Jan 2 at 20:01
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    @keshlam there are no words missing. You’re selling your right to sell the bundle of "100 shares of MBI and $800.00" for a price of $0.00 by January 19. Means: youre selling 800 cash and 100 shares and getting 0 cash. You're giving away 100 shares and 800 of your own money as compensation for the dividend. For this trade to make sense, the 0 should be way above 800. E.g. if it said your selling 100 shares with price of 6 = 600 and 800 cash for 1500, you'd make a profit of 100.
    – DonQuiKong
    Commented Jan 3 at 6:48

2 Answers 2

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Options created after the $8 special dividend that have strikes above current share price are in-the-money. While your option appears to be ITM, it is not because the $8 dividend is attached to delivery (options created prior to the special dividend have been adjusted by that amount).

The adjusted options now have the symbol MB1. If you exercise your put, you must deliver 100 shares PLUS $800.

Below are the details from the OCC memo. If so inclined, Google for the original.


Subject: MBIA Inc. - Cash Distribution

Option Symbol: MBI

New Option Symbol: MBI1

Date: 12/26/2023

MBIA Inc. (MBI) has announced a Special Cash Dividend of $8.00 per MBI Common Share. The record date is December 18, 2023; payable date is December 22, 2023. The ex-distribution date for this distribution will be December 26, 2023.

Options Contract Adjustment

Effective Date: December 26, 2023

Strike Prices: No Change

Option Symbol: MBI changes to MBI1

Deliverable Per Contract:

  1. 100 MBIA Inc. (MBI) Common Shares
  2. $800.00 Cash ($8.00 x 100)

Here's another way to look at it. For example, when the stock was $14, you bought the $8 call. When the distribution occurred, share price dropped to $6. If you exercise your put, you receive $800 (100 times the strike). You must deliver 100 shares plus $800.

If you don't own the shares, you short 100 shares and receive a $600 credit for that:

  • $800 (credit from exercise)
  • $800 (delivered dividend)
  • $600 (for shorting shares)

= $600 credit (which is what 100 shares are worth)

The shares are $6 so covering would cost $600. Add that to the above credit and the result is zero.

There's no profit in this and so your option is quoted with a value of zero.

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8

MBIA paid an extraordinary dividend of 8$ on Dec 26, 2023, announced on Dec 7, 2023.

When exercising the put you are supposed to pay that dividend, so the put gives you the right to pay this dividend in addition to the shares (so you get $8 per share and you give the shares and $8 per share dividend), therefor the "and $800" - which would make your options worthless, e.g. you can sell that right for $0.

This will also apply if you exercise the put.

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  • That makes sense., I think.
    – keshlam
    Commented Jan 2 at 14:13
  • @Solarflare - This doesn't read well. You left out some words in second paragraph. Also, all (not some) options in existence are adjusted at the time of the special dividend. Unadjusted options now trading were created after the dividend. There is no luck involved here, eg. "the price didn't correctly adjust to the announcement". The special dividend doesn't make options worthless. Commented Jan 2 at 19:53
  • @BobBaerker You are right, I just removed that part.
    – Solarflare
    Commented Jan 3 at 9:39

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