Adjustments in Ebay's options after spinoff.

[bantrader]

Is there any expert in the community who knows what kind of  adjustments will be made on Ebay options after the PayPal's spinoff?

 

For example, what would be the setting for holders Call option Ebay strike:70 expiration: January 2017 ?

 

I understand that would be as follows:

 

Pre Spinoff: Long Ebay Calls strike 70 January 2017

 

Post Spinoff: Long Ebay Calls strike ? January 2017 + Long Paypal Calls strike ? January 2017

 

The question is: How does it be calculated the new strike price of both options?

 

Thanks in advance,

[pocoapoco]

Is there any expert in the community who knows what kind of  adjustments will be made on Ebay options after the PayPal's spinoff?

 

For example, what would be the setting for holders Call option Ebay strike:70 expiration: January 2017 ?

 

I understand that would be as follows:

 

Pre Spinoff: Long Ebay Calls strike 70 January 2017

 

Post Spinoff: Long Ebay Calls strike ? January 2017 + Long Paypal Calls strike ? January 2017

 

The question is: How does it be calculated the new strike price of both options?

 

Thanks in advance,

 

Think of the strike as what you have the option to pay to get the deliverable  (usually 100 shares of the stock).  So, pre-spinoff, by owning 1 contract of the $70 strike calls you have the option to pay $7000 (there's a 100 multiplier) to buy 100 shares of EBAY.

If EBAY spins off 1 share of PAYPAL for each share of EBAY, the deliverable of the options contract will be adjusted to represent 100 shares of EBAY  -plus-  100 shares of PAYPAL.  So, you would have the option to pay $7000 to purchase 100 shares of EBAY and 100 shares of PAYPAL.

 

Within a day or so, they will then list a new series of options contracts that will just represent 100 shares of EBAY.  At this point, if a person wanted to buy options on just pure (post spinoff) EBAY they would be able to do so.  But the old series of options sticks around, so there will likely exist two EBAY $70 2017 calls  - the old ones (100 EBAY + 100 PAYPAL) and the new ones (100 EBAY).  It will be important to make sure you are trading the right ones if you want to do new trades.

 

[ItsAValueTrap]

In very rare cases, what pocoapoco describes won't happen.  The OCC gets to decide what happens.

 

IMO it is extremely likely that what pocoapoco describes will happen.

[bantrader]

Is there any expert in the community who knows what kind of  adjustments will be made on Ebay options after the PayPal's spinoff?

 

For example, what would be the setting for holders Call option Ebay strike:70 expiration: January 2017 ?

 

I understand that would be as follows:

 

Pre Spinoff: Long Ebay Calls strike 70 January 2017

 

Post Spinoff: Long Ebay Calls strike ? January 2017 + Long Paypal Calls strike ? January 2017

 

The question is: How does it be calculated the new strike price of both options?

 

Thanks in advance,

 

Think of the strike as what you have the option to pay to get the deliverable  (usually 100 shares of the stock).  So, pre-spinoff, by owning 1 contract of the $70 strike calls you have the option to pay $7000 (there's a 100 multiplier) to buy 100 shares of EBAY.

If EBAY spins off 1 share of PAYPAL for each share of EBAY, the deliverable of the options contract will be adjusted to represent 100 shares of EBAY  -plus-  100 shares of PAYPAL.  So, you would have the option to pay $7000 to purchase 100 shares of EBAY and 100 shares of PAYPAL.

 

Within a day or so, they will then list a new series of options contracts that will just represent 100 shares of EBAY.  At this point, if a person wanted to buy options on just pure (post spinoff) EBAY they would be able to do so.  But the old series of options sticks around, so there will likely exist two EBAY $70 2017 calls  - the old ones (100 EBAY + 100 PAYPAL) and the new ones (100 EBAY).  It will be important to make sure you are trading the right ones if you want to do new trades.

 

 

Thank you both for your contributions.

 

I guess the OCC (Options Clearing Corporation) to set the strike for the Ebay's new options will be taken into account:

 

- or the opening trading price of the shares of Ebay as independent entity (after split).

- or the closing price of the first day as a independent Ebay.

 

I will consult with the OCC to see if I can still clarify a little bit more this things.

 

I'll keep you informed,

 

By the way, according to your nick (pocoapoco) I think you're from a Spanish-speaking country. Is that so? I'm from Spain.

 

 

 

[twacowfca]

Is there any expert in the community who knows what kind of  adjustments will be made on Ebay options after the PayPal's spinoff?

 

For example, what would be the setting for holders Call option Ebay strike:70 expiration: January 2017 ?

 

I understand that would be as follows:

 

Pre Spinoff: Long Ebay Calls strike 70 January 2017

 

Post Spinoff: Long Ebay Calls strike ? January 2017 + Long Paypal Calls strike ? January 2017

 

The question is: How does it be calculated the new strike price of both options?

 

Thanks in advance,

 

Think of the strike as what you have the option to pay to get the deliverable  (usually 100 shares of the stock).  So, pre-spinoff, by owning 1 contract of the $70 strike calls you have the option to pay $7000 (there's a 100 multiplier) to buy 100 shares of EBAY.

If EBAY spins off 1 share of PAYPAL for each share of EBAY, the deliverable of the options contract will be adjusted to represent 100 shares of EBAY  -plus-  100 shares of PAYPAL.  So, you would have the option to pay $7000 to purchase 100 shares of EBAY and 100 shares of PAYPAL.

 

Within a day or so, they will then list a new series of options contracts that will just represent 100 shares of EBAY.  At this point, if a person wanted to buy options on just pure (post spinoff) EBAY they would be able to do so.  But the old series of options sticks around, so there will likely exist two EBAY $70 2017 calls  - the old ones (100 EBAY + 100 PAYPAL) and the new ones (100 EBAY).  It will be important to make sure you are trading the right ones if you want to do new trades.

 

 

Thank you both for your contributions.

 

I guess the OCC (Options Clearing Corporation) to set the strike for the Ebay's new options will be taken into account:

 

- or the opening trading price of the shares of Ebay as independent entity (after split).

- or the closing price of the first day as a independent Ebay.

 

I will consult with the OCC to see if I can still clarify a little bit more this things.

 

I'll keep you informed,

 

By the way, according to your nick (pocoapoco) I think you're from a Spanish-speaking country. Is that so? I'm from Spain.

 

Pocoapoco, compadre compreme un coco.  :)

[bantrader]

I asked to the OCC (Options Clearing Corporation) about the adjustments in spinoff case , and here we go with the answer from them:

 

Dear Iban,

 

Thank you for your interest in options and for your inquiry.

There are a few sources you may want to review that discuss spinoffs.

One simple example is provided in Chapter III  of  Characteristics and Risks of Standardized Options on pages 20-21: http://www.theocc.com/about/publications/character-risks.jsp

We also offer a free online course on Contract Adjustments that discusses the treatment of spinoffs:

http://education.optionseducation.org/course/view.php?id=5

Registration is required to access the courses, but the registration is also free.

 

If there was a contract adjustment to the Ebay options, OCC would publish a memo to its site.

http://www.theocc.com/

 

Finally, contract adjustments are covered in depth in Article VI, Sections 11 & 11A of OCC’s By-Laws.

http://www.theocc.com/components/docs/legal/rules_and_bylaws/occ_bylaws.pdf

Until such time as a memo may be released, this is all the information we can provide.

 

Regards,