How will EMC’s IPO spin-off of VMWare affect my call options on EMC?
Young asks:
EMC’s VMWare is being touted as the biggest IPO since Google went public in 1994. I have January 2010 call options with a strike price of $17.50 on EMC. EMC is currently trading in the $19 to $20 range and word has it that the IPO will be priced between $20 and $25. Obviously we won’t be getting one share of VMWare for each share of EMC. So with each options contract being for a lot of 100 shares of stock, we can’t be getting an options contract for VMWare. So what do options investors get in the case of an IPO spin-off like this?
EMC’s VMWare is being touted as the biggest IPO since Google went public in 1994. I have January 2010 call options with a strike price of $17.50 on EMC. EMC is currently trading in the $19 to $20 range and word has it that the IPO will be priced between $20 and $25. Obviously we won’t be getting one share of VMWare for each share of EMC. So with each options contract being for a lot of 100 shares of stock, we can’t be getting an options contract for VMWare. So what do options investors get in the case of an IPO spin-off like this?
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Nothing changes. Everything is normal. It is not really a spin off. EMC is selling a 10% of its VMWare Unit in exchange for cash. Thats all that is happening.
LEt me answer your question in general. Whenever a company spins off a division to its shareholders, once they start trading independently, you get options of spun off company too.
Lets sat XYZ spins off a division - lets call the new company spinco. If the ratio is a simple 1:2 ( for 2 shares of XYZ you get a share of spinco )
Before spin off –> 100 shares of XYZ
After spin off –> 100 shares of XYZ + 50 shares of spinco
in one contract.
The strike prices for your calls will be adjusted on the day each company trades , and the formula varies, but mainly it is decided by looking at how the “when issued” shares of these 2 companies’ perform for the previous 14 days before the actual spin off happens.
So if you own calls of XYZ , you don’t have to do anything special,
but if you have written calls/puts, make sure you don’t go naked for the 50 shares of spinco after spinoff, you have to include those in your portfolio. Hope that helps…