It is much more difficult for the Sears (S) options.
If you own S shares, into the deal you must elect which you want, either as much KMRT stock as possible or as much cash as possible. The choice depends on where KMRT stock is at the time. If everyone just owned stock, the ending ratio would be 45% in $50 cash plus 55% in half a share of KMRT. The problem arises if you fall asleep and don't elect, you get the scraps: the portion that no one wants.
Let's say there are 100 shareholders and KMRT is at $100, which as you will see is the level of indifference. If 99 shareholders elect for as much stock as possible, but one shareholder does not elect, the 99 shareholders will get 44% in cash and 56% in stock for a value of ((.44 x 50) + (.56 x .5 x 100)) = $50. The sleepy shareholder will get 100% of $50 = $50. Since the value is the same, $100 stock price for KMRT becomes the threshold.
With KMRT at $120, the sharp shareholders will certainly elect for as much stock as possible and will receive $55.60 ((.44 x 50) + (.56 x .5 x 120)) in value and the dull shareholder will receive the same $50.
If KMRT is trading at $80, the sharp shareholders will elect for as much cash as possible and will receive ((.46 x 50) + (.54 x .5 x 80)) = $ 44.60. The dull shareholder will receive $80 x .5 = $40.
So don't fall asleep.
S option holders don't own the stock before they exercise, so they must carefully analyze the situation to determine whether or not they should exercise and then elect. Like our sleepy shareholder, if they do not exercise with KMRT stock over $100, they will only receive $50 in value. If you notice, the puts in S are trading parity to a stock price of only $50 even though the stock price is actually trading around $56. This is because you can buy the stock at $56 and elect to receive that much in value and then buy a 55 strike put and only be responsible for $50 in value. Any arbitrager (me) would gladly pay $4 for that put and lock in $1 in free money.
This is a strange deal indeed. I highly advise anyone with S options to study the above and apply it to your individual position.
Don't fall asleep.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter