If I own a call option on a stock (X=10) that does a spinoff? What are the writers' obligations tome?

Question

In other words, am I ****** if they spin off part of it, because I only have the right to purchase the non-spunoff portion at the exercise price?

Answer 1

Your call option will continue to exist, but with a new symbol. The deliverable will change. It will become 100 shares of the original company plus a pro-rata number of shares of the spun-off entity.

In a simple example: XYZ spins off ABC. XYZ shareholders receive 7.5 shares of ABC for every 100 XYZ they own. One call contract, therefore, will include 100 XYZ plus 7.5 ABC. Please note, however, that in some cases such a spun-off deliverable portion of an option contract is settled in cash, known as cash-in-lieu or CIL for short.

As the long call holder you would have the right to purchase, at the strike price, 100 XYZ plus either 1) 7.5 ABX or 2) you will receive the cash-in-lieu. The short seller of the call will pay the CIL.

Exact deliverable will be determined by the options clearing corporation. You would be able to check your option at their website: www.888options.com. Click "contracts" on the right side of home page.

The amount of cash-in-lieu is determined by a formula related to closing prices of XYZ and ABC on the day of the spinoff.

However, a caution: new options on XYZ will be created after the spinoff. These will be standard option contracts representing 100 shares post-spinoff. The old non-standard options - and you will be a holder of these calls - will become highly illiquid. No new positions will be permitted. The only trades will be parties closing their positions. If you would wish to sell your call, you would have to sell to the specialist's bid, because there will be no other traders bidding.

Answer 2

There are two options. One is after spinoff they can keep it as a subsidiary like many companies in US, in which case your options will remain untampered. The companies will consolidate their financial statement at the end of the year.
Two is if for some risk reason they have spun off then they might try to manage them differently under a different CEO and different financial structure and plan. Some companies do this to reduce risk and when going gets tough in raising capital. These times they create very rare financial instruments like 'mezanine stocks' etc; to finance which have reduced risk profile. In this case chances are that your option might get tampered or might not since the market sometimes assimilate the spinoff as risk avoided.