In Part I of this series, we discussed mergers involving cash settlement only. These events do impact our covered call and put-selling positions. In this article we will highlight mergers that involve both cash and stock and demonstrate how these corporate events can alter our option contract positions.
Company XYZ is merging into Company BCI and BCI is paying for each share of XYZ, 1/2 share of BCI + $5.00 per share: 100 XYZ = 50 BCI + $500.00
The $500.00 remains a fixed amount despite any change in share price of BCI by consummation of the merger.
Changing option symbol
XYZ calls and puts will now trade as BCI1 calls and puts and continue to trade until they expire:
Calculating the “moneyness” of the $25.00 call strike if BCI is trading at $30.00
The aggregate exercise amount per contract ($25.00 x 100) = $2500.00 both before and after the merger. We know that when BCI1 is exercised, 50 shares of BCI + $500.00 is deliverable. If BCI is trading at $30.00 per share, the current contract value is $1500.00 + $500.00 = $2000.00 or $500.00 less than the aggregate exercise amount. This means that the call is out-of-the-money by $500.00.
Eagle Rock Partners, L.P. (“EROC”) Merger COMPLETED
with Vanguard Natural Resources, LLC (“VNR”)
Shareholders of Eagle Rock Partners, L.P. (“EROC”) voted on Monday, October 5, 2015, and
approved a proposed Merger between EROC and Vanguard Natural Resources, LLC (“VNR”).
Pursuant to the terms of the Merger, each EROC Common Unit outstanding immediately prior to the
consummation of the Merger will be converted into the right to receive 0.185 of a Common Unit of
VNR. The Merger became effective today, Thursday, October 8, 2015.
Pursuant to Article VI, Section 11, of OCC’s By-Laws, all outstanding EROC options shall be
adjusted as follows. On Friday, October 9, 2015 each adjusted Eagle Rock Partners, L.P.
contract will require the receipt or delivery of: (A) 18 Common Units of VNR; plus (B) cash in
lieu of 0.5 fractional Common Unit of VNR. Premiums for the adjusted Eagle Rock Partners, L.P.
options will continue to be calculated on the basis of a multiplier of 100, i.e., for premium and strike price
extensions, 1.00 will equal $100. The Eagle Rock Partners, L.P. option symbol will change to
VNR2. [Any FLEX series that may exist will be adjusted in a similar manner to the standardized
Corporate events like stock splits, special dividends, spinoffs and mergers and acquisitions usually result in option contract adjustments which impact our covered call writing and put-selling positions. These changes are made to make both option buyers and sellers “whole” but we still must understand how are contracts are impacting to then allow us to make the best investment decisions. Our brokers will have access to this information or we can call the OCC at 1-888-678-4667 or go online at www.cboe.com and look for contract adjustments.
For more information on contract adjustments:
Pages 193 – 196
Pages 323 – 332
Pages 179 – 183
Pages 299 – 308
Next live appearance
American Association of Individual Investors National Conference
Las Vegas, Nevada
November 7th – November 9th
Sunday November 8th @ 8:30 AM – 9:45 AM (Alan’s seminar)
Exhibit Hall # 313
***Event is sold out
Coming soon: BCI contest
We’re trying something new thanks to Jay’s idea. Here are the initial parameters we are discussing: Two contests running simultaneously with six prizes:
Contest #1: What will be the value of the S&P 500 by year’s end?
Contest #2: In five sentences or less, give your reason(s) for your response (subjective, voted on by the BCI team)
Prizes in each category (total of 6):
- 1st place: Any DVD Program of your choice with signed Companion Workbook or any 3 books (signed) or a 1-hour 1-on-1 training session
- 2nd place: Any 2 books (signed)
- 3rd place: Any 1 book (signed)
- There will be 6 different winners
- Deadline for entering is November 30th
- A tie for contest 1 goes to the earlier entry
- No more than 2 entries per email address, one in October and one in November
- We will post contest leaders weekly in our blog (first name and last name initial only for privacy)
- Send entries to : my team is working on a landing page for this competition
Let us know what you think of this idea. I like it because it stimulates thought and discussion about the markets and the economy and we can all learn from each other. But this site is all about you so I will let you decide if this concept should continue in the future. We expect to get this launched within the next two weeks.
Muted economic data led to a rebound in global stocks, as investors expect central banks to extend their low-interest rate policies. Early corporate earnings reports were mixed, although large banks positively surprised. This week’s reports:
- US retail sales increased 0.1% in September. Rising automobile sales offset less expensive gasoline
- The University of Michigan’s preliminary consumer sentiment index rose from 87.2 in September to 92.1 in October
- The gauge of current conditions jumped from 101.2 to 106.7 over the same month.
- US industrial production fell for a second straight month in September, dropping 0.2% after a 0.1% decline in August
- Initial jobless claims fell 7,000 to 255,000 for the week ending October 10th matching a 42-year low
- Continuing claims declined 50,000 to 2.16 million for the week ending October 3rd
- The Consumer Price Index fell 0.2% in September while the core CPI, excluding food and energy prices, rose 0.2%
- Overall, prices were unchanged from a year earlier, but core prices rose 1.9%
- The Producer Price Index fell 0.5% in September, and core PPI dropped 0.3%
- For the year ending in September, the PPI was down 1.1%, while the core PPI was up 0.5%
For the week, the S&P 500 rose by 0.90% for a year to date return of (-) 1.25%.
IBD: Confirmed uptrend
GMI: 3/6- Sell signal since market close of October 14, 2015
BCI: Cautiously bullish favoring in-the-money strikes 2-to-1
Wishing you the best in investing,