If you own Long LEAP options & the company gets aquired for before expiration for less than exersize price...?

Question

are you screwed? Ex. you own $40 options for 1-09, company meanwhile gets bought out for $35 per share in 07'.

Answer 1

If the company is acquired for less than the exercise price, then even if it hadn't been acquired, you would still have been screwed -- because they would have been out-of-the-money had the deal not gone through. Acquisitions are always done at a price above the market price.

If it is acquired, but they haven't expired yet -- then you would have to look at the terms of purchase. It is likely that the new company would have to grant LEAPs for the new company to the owners of the options.

Answer 2

This question appears to be hypothetical, that is, the buyout has not yet occurred nor is it even looming.

A $35.00 takeover offer would not usually be an all-cash offer. It would usually take the form of some shares of the acquirer plus some cash. There might be a spin-off involved as well. To illustrate:

You hold 1 2009 LEAP in ABC. In 2007, ABC will be sold to company XYZ in a share-plus-cash deal which specifies .75 share XYZ plus $2.60 for every share of ABC.

Your LEAP option will continue to exist, although its symbol will change after the buyout and its new deliverable will be 75 shares of XYZ plus $260.00 in cash.

The market price of this contract will now depend upon the value of XYZ as the underlying or deliverable. In this scenario, the long LEAP holder is not yet totally screwed. The question becomes: what does the future hold for XYZ. If this stock rises, the option will rise also, although it will be encumbered by the cash portion and for other reasons mentioned below.

Consider another scenario: the buyout deal includes .25 share of XYZ plus $22.00 in cash for every share of ABC. After the buyout the LEAP deliverable will be 25 shares of XYZ and $2,200.00 in cash. As the long LEAP holder, this is what you'd be entitled to receive if you exercised. You can see that the future value of XYZ will have considerably less effect upon this LEAP because the proportion of stock is very small.

Finally, in an all-cash offer for $35, the deliverable will become $3,500.00 and the game would be over for the long LEAP holder.

Hint # 1: following a merger, ratio split, spinoff or major reorg, the new deliverables are listed by the Options Clearing Corporation at www.888options.com. Click on contract right-hand side of their home page, consult details of your merger to identify the new deliverable.

Hint # 2: the OCC will be totally logical in determining the new deliverable. They will absolutely respect the memorandum or circular setting forth the terms of the buyout, merger, etc.

Hint # 3: following any such merger, buyout, reorg with spinoff, etc, the old options - the ones that continue to exist with their new lopsided deliverables - will become highly illiquid. No new positions will be opened. Trading activity will be limited to existing longs/shorts closing out their positions.

Hint #4: XYZ will probably have old options of its own. These will continue to exist, deliverable will be 100 shares of "old" XYZ before the buyout. A second group of options will be the former ABC options with their lopsided deliverables as set forth above. They will have different symbols for both regular and LEAP options. And there may even be a third group of options for XYZ whose deliverable will be 100 shares of "new" XYZ including the newly incorporated ABC and if so, this third set will also have a separate set of symbols for regular and LEAP options. All this can be confusing for an inexperienced trader.

Hint # 5: poster above writes that "It is likely that the new company would have to grant LEAPs for the new company to the owners of the options." This statement is so untrue that it's highly misleading. In the first place, companies don't grant options to the public trading exchanges, although they do grant different kinds of non-public options to upper management as part of pay packages. Tradeable options - the kind that give rise to LEAPs - are organized by the various public options exchanges. The companies have nothing to say about this, cannot even prevent it. In the second place, the old ABC options will continue with new deliverables as set forth above.