I came across this site while searching for info on how to price call options (leaps; jan 2011) which I own in UYG.
The ETF shares where subject to a recent 10:1 reverse split.
Could you point me in the direction of an options pricing model/calculator that would enable me to determine the theoretical price of the new options
hope you can help
First, just in case you don't have all the details, this CBOE page provides them: http://www.cboe.com/framed/PDFframed.aspx?content=/publish/TTStockSM/10-188.pdf§ion=SEC_RESOURCES&title=CBOE%20-%2010-188+ProShares+Ultra+Financials+%28%22UYG%2FUUF%2FZYW%2FYJD%22%29+1-for-10+Reverse+ETF+Split
Next, just a warning: Owning leveraged ETFs (or the call options) is generally not a good idea. It's more efficient to spend a bit extra on commissions and own twice as many shares of the unleveraged ETF. These leveraged puts underperform because of the way they are designed. A true scam on the individual investor. These are designed for day-trading only But that's another story.
The answer to your question: I don't believe there is a calculator that does this. The calculator would have to allow you to designate how many shares are represented by each contract, and I am not aware of any that does that.
Let's look at the May 5 call. The ETF is currently 76. You know that the May 5 call used to be the May 50 call, and that the old call had an intrinsic value of 26. Thus, the new call, with a strike price of 5, has an intrinsic value of 2.60. There may or may not be any time premium attached to the option. The current market price of $2.40 bid; $2.80 asked, tells you that this $2.60 price is correct and that there is no time premium.
Your LEAPS call carry some time premium.
The best way to value the call is to use the old strike price (current strike x 10), use the calculator as you normally do, then divide by 10 to give you the theoretical price of the option.
It's difficult for me to put in words. But you lost/gained nothing from this split. Your old option gave you the right to buy 100 shares at $5 (for example). Cost to exercise: $500. The current option still gives you right to buy $500 worth of the underlying, or 10 shares @ $50 per share. I hope this makes sense - because the new rules are needlessly confusing in my opinion. Each option trades at 1/10 of it's theoretical price because it only good for 10 shares, not 100.
If you compare the prices of the newly listed options, you should be able to see that difference. One suggestion: Outside of exiting your LEAPS at some point, I would not trade these calls again. If you must trade this leveraged ETF, trade the newly listed options with 'normal' strike prices.
Mark D Wolfinger
Partner and Director of Public Relations
Expiring Monthly: The Option Traders Journal