Pending mergers make lots of traders wonder what will happen with their existing shares. The same holds true for traders holding options on pending-merger stocks. Take TK client Grippo, who recently posted this question to the forums:

“I own a $7 call option on JAVA (SUQ JH) which expires 10/17.  What will happen to it when/if Sun sells to Oracle for $9ish a share?  Am I better to hang on to it and let it expire, or should I "buy to close" this position ahead of the sale?

I think I have the terminology/basic concepts of option trading down, but feel free to correct me!”


Hello Grippo,

First, a clarification: You already own the option, so you cannot “buy to close.” You would “sell to close.” The term ‘close’ refers to the fact that you would be exiting, or closing your position. ‘Sell’ means what you think it means.

If the company is sold to Oracle and if ORCL pays $9 per share, then your call option will be worth $200. When there is a takeover, the owner of a call option is entitled to exercise that call and receive the same package the ORCL paid to the owner of 100 shares of JAVA. In this example, that would be $900.

Thus, you pay $700 to exercise the call and instead of shares, you would receive $900 (less the commission of $9.95, or $$890.05). That’s why the option is worth $200. But keep in mind you don’t have to exercise your option. You can sell it and collect the same premium – and sometimes, a higher premium.

However, until the deal is 100% done, there’s always the possibility that it could fall apart.  That’s why holding the call option is risky.  

On the other hand, there is also the possibility that another company will pay a higher price.  As of this writing, JAVA was trading above $9 per share. That makes there’s market speculation that a better bid may be coming. That’s why holding the option longer may be rewarding.

Unfortunately, no one can tell you if you will be better off holding or not.  Do you want to sell your option for the current price, considering the potential risk and reward? That’s your decision. It’s difficult to judge just how much you can lose or gain – but my thought is that any potential loss is much larger than the possible gain.


Regards,
Mark Wolfinger
Founder, MDW Options
TradeKing All-Star Commentator

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

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