|
"Why are there more than one option of the same underlying, strike and expiration?"
|
|
|
|
Question By Farzin
"Why are there more than one option of the same underlying, strike and expiration?"
Could you kindly explain to me why some options with same underlying stock and same expiration date very in price? For example,
why does BAC's Jan2010 $5.00 options come with 3 different price listing?
Asked on 24 March 2009
|
Answered by Mr. OppiE
Hi Farzin,
Isn't it interesting to see that those $5 call options, which are deep
in the money as BAC is trading at $7.22 at this point of time
be selling for lesser than its
intrinsic value?
If you work the math, you will find that $5 call options should be $2.22 in the money, which means that its price should include $2.22
of intrinsic value, so why is it selling for much much lesser than $2.22?
Those extra options with the same expiration and strike price but weird pricing that you are looking at are
Adjusted Options.
Adjusted options are non-standardized options that have been adjusted in value and
deliverables due to major corporate events such as merger
and acquisitions that changes the capital structure of a company. Big companies like BAC go through mergers and acquisitions all the time.
In fact, BAC just acquired MER recently in January. Such acquisitions are usually paid for with shares of the buying company or cash or both.
When that happens, the share price of the buying company drops due to outflow of capital assets. Holders of the buying company's shares will
now hold shares of both the buying company and the bought company. Holders of options prior to the event would have their options adjusted in
value and deliverables in order to reflect that change in capital structure and hence the creation of adjusted options.
Adjusted options DO NOT convert to 100 shares of the underlying stock like regular standardized options do, so there is no way to tell if those
options are in the money or
out of the money just by looking at their strike price. In fact, you won't even know exactly what those options
convert into and how their prices change in accordance to changes in price of the supposed underlying stock.
In fact, if you used the options chain from your
options trading broker, you probably won't even see these adjusted options as they are mostly
screened off by default in order to avoid confusion.
In conclusion, these options with weird pricing are not mispriced. They are simply based on different things due to
changes in capital structure. These are not options you should buy to simply speculate on the underlying stock as these options may not convert
totally into shares of the underlying stock in the first place. As an options trader, you should avoid trading these adjusted options.
Please read the full tutorial on
Adjusted Options.
Response by Farzin...
Reply by Mr. OppiE...
Response by Others...
|
|
|
