Options Trading Tutorial

What happens to a company's stock options when the company is acquired by either a private or public company?

In other words, if I buy a call option that expires in January 2010, and the company is aquired before that time, what happens to my right to buy shares in the acquired company? Am I compensated for the call option at the time of the acquisition? If so, at what price? Does my option (and right)disappear? If the acquiring company is a publicly held company, I assume that the options just convert to an equivalent stock option in the acquiring company. Is this correct?

Public Comments

1. You will not be compensated outside a potentail rise in the value of your options. If the strike price of your options is more than the takeover price, the options become worthless. Let's say you bought Jan 2010 options on YHOO at $40. If MSFT buys YHOO in before then for $31 or any price less than $40, your options are worthless. In reality, let's say MSFT ups their bid to $39.99, your options might rise in value as the stock trades near $39.99 (speculation of another bidder, another rise in offer price), but on the day that the merger is completed at that price, the options go to $0.
2. <<<What happens to a company's stock options when the company is acquired by either a private or public company?>>> For exchange traded options the contracts are adjusted to make the underlying be the same thing the owner of 100 shares of the stock received. <<<In other words, if I buy a call option that expires in January 2010, and the company is aquired before that time, what happens to my right to buy shares in the acquired company? Am I compensated for the call option at the time of the acquisition? If so, at what price? Does my option (and right)disappear?>>> Example 1: If the shares were bought out for $87 per share your call option would be converted to make the underlying $8,700. This means if your call had a strike price above $87 it would effectively become worthless, but if it had a strke price below $87 it would effectively become worth a fixed amount. If the stirke price was $65 it would be worth $2,200 but you would have to exercise the option to receive the money. <<<If the acquiring company is a publicly held company, I assume that the options just convert to an equivalent stock option in the acquiring company. Is this correct?>>> It is correct if the owner of 100 shares of the acquired company received shares of the acquiring company. Example 2: If the buyout gave the owners of the acquired company 0.48 shares of the new company for each share of the old company in the buyout, the underlying for the option would be adjusted from 100 shares of the acquired company to 48 shares of the acquiring company. For examples of contract adjustments from past acquisitions, see http://www.cboe.com/tradtool/contracts.aspx