Can you still trade options after a buyout is announced?

Yes. Listed options on the target usually keep trading until the deal closes, though volume and interest can thin out. Prices change sharply on the announcement, because the stock tends to settle just below the offer price and implied volatility falls with it.

What happens to a covered call when the company is bought for cash?

If the deal price is above your strike, the short call gains intrinsic value as the stock moves toward the offer, and early assignment becomes more likely. You keep the premium and the strike price for the shares, so the gain above the strike goes to the call buyer. At closing, the contract settles against the cash deliverable.

What Happens to Your Options in a Buyout?

Q: What Happens to Your Options in a Buyout?

The Options Clearing Corporation adjusts listed contracts to match the deal. In an all-cash deal the deliverable becomes cash, so calls below the offer price settle toward their intrinsic value and puts lose most of their worth; in a stock deal the deliverable becomes shares of the acquirer. If the deal breaks, prices can swing hard the other way.

The morning a cash offer is announced, the option chain on the target looks flattened. The stock jumps to just under the offer. Then it barely moves. Calls struck below the offer trade close to intrinsic value, puts collapse, and implied volatility, which was pricing a stock that could go anywhere, now prices one with a known destination and a rough date for getting there, so the premium you paid for uncertainty drains out of every contract at once.

What happens to a call you already own?

Take a hypothetical company trading at $40. You bought a 45 call for $3.00, or $300 for the contract. An acquirer offers $50 a share in cash. The stock climbs to about $49.50. It stays a little under the offer because the deal still has to close.

The call is worth about its intrinsic value and little more. Before the offer, part of the price was time value. That was a payment for the chance of a run well past $45, and once the deal puts a ceiling at $50 the chance is mostly gone, so the time value and most of the implied volatility go with it and the call trades as a claim on the gap between strike and stock.

A call struck above the offer fares far worse. Take a 55. With the stock pinned near $49.50 and a ceiling at $50, it has almost no path into the money. Its price falls toward zero.

Why do puts lose?

Puts pay when the stock falls. A pending cash deal holds the stock near the offer. Unless the deal falls apart, there is little room to drop, so put premiums shrink hard on the announcement day and keep shrinking as the closing date approaches and the chance of a break looks smaller with each regulatory step the deal clears. Protective puts lose most of what they cost. The shares under them rose, of course.

How does the OCC adjust the contracts?

The Options Clearing Corporation clears listed US options. It changes contract terms to match the deal. When the deal pays only cash, each standard contract ends up delivering $50 x 100 = $5,000 in place of 100 shares. In a stock deal the deliverable becomes acquirer shares.

What happens in a stock deal?

Say the acquirer offers 0.5 of its own shares for each target share. One contract covered 100 target shares.

The strike stays the same in total. Exercising a 45 call still costs $45 x 100 = $4,500. Now it buys 50 acquirer shares. From here on, the call’s value tracks the acquirer’s price, which means a position you opened on one company’s prospects has become a position in a different company with its own earnings dates, its own volatility and possibly a balance sheet stretched by the deal itself. Mixed deals of cash plus shares get a deliverable holding both. Adjusted contracts often carry a new symbol and trade thinly, with wide spreads, so check the quote on the adjusted series before you assume you can close near its theoretical value.

What if the deal breaks?

The pin comes off. A target near $49.50 on a $50 offer can fall back toward its old price if regulators block the deal, financing fails or the buyer walks. Say it drops back to $40. The 45 call is out of the money again and worth only its remaining time value, while puts that looked worthless can jump, and implied volatility often rises sharply as the market goes back to pricing a stock whose future is open again. Anyone who bought calls after the announcement, near intrinsic value, takes the whole drop from $4.50 to that remaining time value in one session.

The gap between $49.50 and $50 is the market’s price for that risk. It looks small in the quote. It isn’t small if it happens.

What should you do with the position?

Weigh what’s left. A call near intrinsic has little upside, since at a $50 close it reaches $5.00 of intrinsic value, only $0.50 above where it trades. Selling locks in the $150 profit. Holding earns another $50 at most on a close at $50, plus whatever a higher bid might add, in exchange for carrying the full downside of a broken deal. For positions built from options that behave like stock, synthetic long stock explains how the legs move together.

If you also own the shares, what happens to your dividend when a company is acquired covers the payouts. Covered-call writers can go on to after the covered call. The options hub has the rest.