bac buys cfc

When B of A bought countrywide (cfc) they put an approximate value swap of 5.5 to one. The day of acquisition my cfc jan/10 strike $30 was down to .01 cent. I hold 50 units
(5000 options)(you hold the right to buy 5,000 shares, not '5,000 options' of cfc.

I figured I would only have about 900 options at .01 cents when all was said and done.You still own the same 50 options you held previously.

According to the CBOE, each adjusted Countrywide Financial Corporation contract will require the receipt or delivery of: (A) 18 shares of BAC Common Stock, plus (B) cash in lieu of 0.22 fractional share of BAC Common Stock.

In other words, by paying the strike price of $30/share, or $3,000 - you get 18 shares of BAC plus a small amount of cash for each option.  Obviously, paying $3,000 for 18 shares of BAC means that BAC would have to be $166 per share before these options become in the money options.

Here's why:
  • The merger did not change what it costs you to exercise an option. That remains $3,000.
  • The merger  did not change what you receive when you exercise the options, and that's still whatever the owner of 100 shares of CFC receives, or ~18 shares of BAC
  • Yes, the options are still worthless.
Instead the first day after aquisition I noticed I sitll had 50 units worth That is correct .05 cents each. Your brokerage firm 'marked' these options at 5 cents, even though they did not trade (and are likely to never trade again). I also notice that there was no volume that day so BofA must have set the price. BAC did not 'set the price.'  No corporation has anything to do with the trading or price of its options.  When the option did not trade on its first day, it had to be assigned some price.  Either your individual broker, or more likely the Options Clearing Corporation ( the price.  That price does NOT reflect the value of your options.  They are worthless.  I absolutely, do not understand.

Now I'm going to assume that the powers that B know what they are doing Bad assumption. by making my stock options go up five hundred percent in one day. If possible could you explain it to me.

Then I would like to know what has happened to my strike price. The day before acquisition I was 85% away from strike ($5 to $30). The day after acquisition I'm only about 25% away ($22 to $30). The current strike price of 30 is still good - BUT YOU ONLY RECEIVE 18 SHARES when you exercise.  You would still have to pay $3,000 (100 times the strike) to get those shares, so these options are much, much further out of the money than they appear.  I'm sure the writers of the options wouldn't be happy if the numbers I see are true.

Then a final question. Theoretically speaking, lets just say bac turns things around and their stockprice goes up 50% to $30+ in say the next year leaving six months to go on the options. What will happen to my options. NOTHING. Will they be in the money, No.  They will be very, very far out of the money.  or are these options working off a different board somewhere. No. 

I realize this is basic math, It's not the basic math that's the problem.  It's recognizing that you get only 18 shares for each option.  Here's some advice:  the CBOE always describes 'contract adjustments' after a merger.  I found the above info by using Google: "CFC, BAC, CBOE Merger) but I really feel out of the loop on this one. I mentally wrote off this play and just figured it was a bad bet.You were correct on that.  Now I don't know what I have. What makes it more interesting for me is I also hold bac options  for jan/10. It will be fun to watch no matter what. I hope you still think it's going to be fun.  There is no chance that these options will gain value.

I hope you can answer my questions. :-) 
Rick L
Let me know if this is still confusing.

Mark D. Wolfinger
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