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If I sell a call option and the company is then acquired before the option expires what happens to the premium I received.

For example, I sold a call option for January 2018 with a strike of $130. What happens if the deal closes in December and the acquire pays the existing shareholders out at $128? Do the options expire out of the money and I get to keep all of the premium received on sale?

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Simply put, yes.

I bought that call. I was betting the shares would rise in value by Jan 2018, and chose the $130 strike. With a strike nearly a year away, I paid a premium that was all time value as the shares traded at

Now the shares are replaced by $128. The time value has gone to zero, and there is no intrinsic "in the money" value. If the shares were bought at $140, the time value stills drops to zero, but the option is closed at $10 in the money.

My answer was for a cash deal. In a case where the old shares are replaced by new shares or a combination of shares and money, the options terms are changed to reflect the combination of new assets for old.

Update based on disclosure that it's Monsanto we are discussing.

Bayer and Monsanto have announced that they signed a definitive agreement under which Bayer will acquire Monsanto for USD 128 per share in an all-cash transaction. Based on Monsanto’s closing share price on May 9, 2016, the day before Bayer’s first written proposal to Monsanto, the offer represents a premium of 44 percent to that price.

You can see that the deal has been in the works for some time now. Further research shows they expect the deal to close by "the end of 2017".

It's not a done deal. This is why the options are still trading.

  • Thanks, further question. Why is there still a market for such options. I see there are still buyers at $0.25. What can they possible hope to get? – Investor Mar 8 '17 at 16:25
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    Has the sale closed? Or is it pending? If pending, the 25 cents is a bet it won't. – JoeTaxpayer Mar 8 '17 at 16:35
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    @Investor what company are you talking about? If you have a real scenario you'll get a better answer since there will be less variables. – D Stanley Mar 8 '17 at 16:43
  • Sorry, this is the Monsanto call option. – Investor Mar 8 '17 at 16:48

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