Table of Contents

What Happens to Call Options When a Company Is Acquired?

Favorability of a buyou🎀t depends largely on the strike price of your option

By

澳洲幸运5开奖号码历史查询:Chad Langager

Updated October 01, 2024

Reviewed by

Robert C. Kelly

Part of the Series

Guide to Mergers and Acquisitions

Mergers and Acquisitions (M&A): Types, Struct♕ures, 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开奖号码历史查询:fair market value. The favorability of a buyout situation largely depends on the 澳洲幸运5开奖号码历史查询:strike price of the option some 澳洲幸运5开奖号码历史查询:call option holders own, however, as well as the price 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开奖号码历史查询: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开奖号码历史查询:expiration date. It w𒆙ou🍸ld 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 a 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 valu⭕e if the offer price is below the strike price of the call option but opti💧ons with strike prices below the offer price will see a spike in value.

Important

Call options are considered to be 澳洲幸运5开奖号码历史查询:out-of-the-money (OTM) if they have a strike price higher than the current market price. They become 澳洲幸运5开奖号码历史查询:in-the-money (ITM) as the price of the underlying rises above thatꦗ st🥃rike 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 in🍌dicate♈s 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 the𓄧n sell t𝓡he shares in the market at a premium.

What Happens to Call Options in a Merger?

The two companies that merged combine into a new entity when the merger is completed. Trading in the options of the previous entities wi꧋ll cease at that time an෴d 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 optionsꦜ. Option holders will suffer losses if the strike price is above the offer price, however.