What happens when a takeover occurs before the expiration date at a company where I am short calls in the stock?
Corporate actions such as mergers, acquisitions and spin-offs often necessitate a change to the amount or name of the security deliverable under the terms of the contract. When such adjustments occur, the short call position must deliver the adjusted security at the strike price where the call was sold.
For example, the shareholders of company JKL Inc. have approved a takeover bid placed by Global Giant Co. As a result, holders of JKL stock will now be entitled to .50 shares of Global Giant for every share owned of JKL Inc. Therefore, holders of JKL call options will now be entitled to a deliverable amount of 50 shares of Global Giant for every contract of JKL that they own (100 shares per contract x .5 Global Giant). Investors with short positions in JKL call options are then responsible for delivering 50 shares of Global Giant for every call option assigned.
For the sake of this example, we used a simple conversion ratio. However, not all corporate actions have such clearly defined terms. Often assignment requires the short position to deliver fractional shares and a cash equivalent. An adjustment panel consisting of representatives of the listing options exchanges and one OCC representative (who only votes in case of a tie) determine whether to adjust an option because of a particular corporate action by applying general adjustment rules. Again, whatever the terms, the short position has the potential obligation of delivering the adjusted underlying.
For access to specific contract adjustment memos, search by company name or symbol in OCC’s Information Memos search.