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Q&A: What is a nonstandard option contract size?

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Nick Cifonie, host of www.rei-tv.com talks about the contracts you should be using when you sell with a lease option.
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Question by Frank: What is a nonstandard option contract size?
GG seems to have a lot of option contracts that are nonstandard. TDAmeritrade states the contract size is 169 shares (not the standard 100). What does this mean when I sell to open a covered call? What does it mean if I get called out?

Best answer:

Answer by strath
Options contracts are always adjusted after a major reorg such as a buyout, merger, reverse split, ratio split with spinoff, etc.

These adjustments are always highly individual, respecting the terms of the memorandum or offer that governed the reorg.

The “old” option contracts prior to the reorg will be given new symbols and the deliverable for each contract, also called the underlying, will change.

Details of each adjustment can be found at www.888options.com. Click on “contracts” right-hand side of their home page. It appears that your broker is TD Ameritrade and they have already mentioned that the adjusted contract, in your case, is 169 shares.

Goldcorp bought Glamis. There may be other adjustments. Therefore there are at least two separate series & classes of options, both based on GG. Would you be kind enough to research this yourself. Options traders must be able to carry out this type of research instantly, easily and accurately, so if you don’t understand right now what has happened, this is an excellent learning opportunity.

Hint: you will find that everything is perfectly logical.

Hint # 2: following such an adjustment, new options drawn upon 100 shares of the post-reorg company will be created. These will become the standard trading options. The “old” options – the ones with the adjusted or lopsided deliverables – will become highly illiquid. No new positions will be created. The only trades will be longs or shorts closing their positions. B/As (bid/asks) will increase dramatically. You want to consider carefully what it means to be long or short such an option.

Hint # 3: In a few cases, the takeover company had old options of its own before it bought out the target. These “old” options will form a third group with a third set of symbols. As an example, takeover XYZ bought ABX in a complicated deal for part shares/part cash. “Old” XYZ options adjusted & given new symbol after reorg. “Old” ABX options adjusted & given new symbol after reorg. “New” XYZ options with standard 100-share contracts created after reorg.

As time passes, the “old” options will expire and disappear, leaving only the “new” or standard 100-share put and call contracts.

All this can be confusing for an inexperienced trader. With the merger activity today, there are significant numbers of these situations and even the media have begun to publish articles. Good luck with any positions you may have, and please study them carefully before you take action.

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