Hi Mark,

This thread is very informative.  Thanks for the education.

My question is simple.  Say if I purchase company ABC Jan 09 $20 Call, what happens if company ABC gets acquired by another company for $19 a share?  The Call option is not yet
expired, but if company ABC gets bought out and the transaction completes before Jan 09, what will happen?

Thanks a lot,
Ronald

Hello Ronald,

I appreciate the compliment.

If the company is acquired for $19 CASH, your option is worthless.  Period.  You still have the right to exercise and pay $2,000.  For that $2,000 you would receive $1,900 cash.  Thus, it's worthless.

If the company is acquired for $19 in stock (or bonds or other 'stuff'), then the option still has value.  The original option owner still maintains the right to the identical package as the owner of 100 shares of ABC received.  If it's cash, you can exercise and get cash.  If it's 52 shares of XYZ company, then you can still pay $2,000 to exercise your call and receive 52 shares of XYZ.  Thus, in this case, the option is far from worthless.

One point:  I only mentioned exercising the options above.  Of course, you can always sell the option.  In the first example, there will no bids, but in the 2nd, the option will still be trading (with a new symbol).

Mark

--
Mark D. Wolfinger
The Rookie's Guide to Options:
The Beginner's Handbook of Trading Equity Options
http://www.mdwoptions.com