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What Happens to Call Options When a Company Is Acquired?

Favorability of a buyout depends largely on the s𝔉trike price of your option

By

澳洲幸运5官方开奖结果体彩网:Chad Langager

Updated October 01, 2024

Reviewed by

Robert C. Kelly

Part of the Series

Guide to Mergers and Acquisitions

Mergers and ܫAcquisitions (M&A): Types, Structures, and Valuations

Basics of Mergers & Acquisitions

Takeovers

Reverse Mergers

Effects of M&A

M&A Transactions and Processes

Types of M&A

M&A Examples

An announcement that one company is buying another is typically good news for shareholders in the company that's being purchased. The price offered is generally at a premium to the company's 澳洲幸运5官方开奖结果体彩网:fair market value. The favorability of a buyout situation largely depends on the 澳洲幸运5官方开奖结果体彩网:strike price of the option some 澳洲幸运5官方开奖结果体彩网:call option holders own, however, as well as the pric🎀e being paid in the offer.

Key Takeaways

A call option grants the holder the right to purchase shares of stock at a predetermined price before it expires.
The target company usually sees its stock price jump when a company decides to buy another company.
The holder can profit from the difference between the strike and the takeover price if a company is acquired at a higher price than the call's strike price.
The option will expire worthless if the strike price of the call is higher than the market price or takeover price ever is.
Employees with vested stock options of the target company will typically be compensated by the acquirer.

Strike Price

A 澳洲幸运5官方开奖结果体彩网:call option affords holders the right but not the obligation to purchase the underlying security at a set price at any time before the 澳洲幸运5官方开奖结果体彩网:expiration date. It would be illogical to exercise the option to purchase the share if the set price were higher than the current market price, however. This effectively limits how high the share price will rise in the case of a buyout offer where aও set amount is offered per share, assuming that no other offers are made and the existing offer is accepted.

The option can easily lose the majority of its value if the offer price is below the strike price of the c🔴all option but options with strikꦓe prices below the offer price will see a spike in value.

Important

Call options are considered to be 澳洲幸运5官方开奖结果体彩网:out-of-the-money (OTM) if they have a strike price higher than the current market price. They become 澳洲幸运5官方开奖结果体彩网:in-the-money (ITM) as the pri𒉰ce of the unde🥃rlying rises above that strike price.

Call Options in a Buyout

Let's say XYZ Casino has received a buyout offer from its management for $82 per share. Options expiring on that day with a strike price of $70, well below the $82 offer price, rose from $11.40 to $17.30. This would be a whopping 52% increase. But those same options with a strike price of $90, well above the $82 offer price, fell from $3.40 to $1.00, representing a staggering 71% loss.

✤ The change in the value of the option🌼 on that day indicates that some option holders fared well but others took hits.

Should I Exercise Call Options Before an Acquisition?

You should wait until the stock price rises pending an acquisition. This allows you to exercise them at the relatively lower strike price and then sell the shares in🧸 the market at a premium.

What Happens to Call Options in a Merger?

The two companies ℱthat merged combine into a new entity when the merger is completed. Trading in t༒he options of the previous entities will cease at that time and all options on that security that were out-of-the-money will become worthless. This is generally determined by the very last closing price on that stock.

What Happens to Vested Employee Stock Options During Acquisition?

Vested employee stock options contain guarantees so employees with vested options will have some options when a company is acquired. The acquiring company might buy out the options for cash. They may also offer to replace those contracts with options for the acquirer of equal or greater value. The stock options may be canceled, however, if those that had been granted are very far out of the money "underwater."

The Bottom Line

Some call option holders handsomely profit from buyouts if the offer price exceeds the strike price of their options. Option holders will suffer losses if the strike🌠 price is above the offer price, however.