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I'm thinking of selling long dated put contracts for a company that I believe may be acquired before the expiration date. I'll use SNAP for my example. What would happen to in the following situation?

I sell the SNAP INC CL A JAN-20 $10.00 PUT and another company buys them for $20.00 a share prior to Jan of 2020.

Does the method of acquisition (cash vs share exchange) matter?

Thanks for you insight!

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If the company is acquired for cash, the expiration of the options expiring after the acquisition date will be accelerated to the acquisition date. Since your proposed scenario involves $20 per share, your short $10 puts will expire worthless and you will keep the premium.

However, if the acquisition is for shares only or for cash and shares in the acquiring company, then the options get adjusted to reflect the terms of the merger/acquisition. Here are some possible scenarios:

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

You can also read about various types of actual option adjustments here:

https://www.theocc.com/clearing/clearing-infomemos/infomemos1.jsp

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If bought for cash - Game over, the $10 Put is worthless and you are zeroed out, keeping the premium. Congrats.

If the target company is taken over with a stock swap or anything but cash only, the options chains are adjusted. In some ratio equal to how the deal went down. You may find you are short a put that is now just 50 shares of the acquiring company (plus a mix of cash), for example at a price that keeps you with equal (or near equal) value of your position.

Note: the 50 is an example, one needs to look at the terms of the acquisition and wait to see exactly what the option contract is converted to.

  • No problem at all. Been there, done that. It's a collective effort, eh? The only thing that I would add is that the 50 share number is due to a specific buyout offer (a) 50 shares or (b) 50 shares plus cash. I understand it (as do you) but a noob might conclude that all puts in such circumstances turn into 50 share obligations. That 'number' varies per the term of the deal. – Bob Baerker Sep 11 '18 at 23:18

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