What Happens to Call Options When a Company Is Acquired?

Call options become more complex when a company is acquired. Since these contracts are tied to the underlying stock, any ownership or structural changes can affect their value. Traders may see adjustments in strike prices, contract sizes, or even forced expiration depending on the acquisition terms.

Different Acquisition Structures

The impact on call options depends on how the acquiring company structures the deal. Whether the transaction involves cash, stock, or both, the terms determine how contracts are adjusted.

All-Cash

In an all-cash acquisition, shareholders receive a fixed price per share, and the stock is typically delisted once the deal is finalized. In-the-money call options are automatically settled for their intrinsic value, while out-of-the-money options expire worthless.

Once the stock is delisted, the options cease to exist. Because of this, traders often close positions early to lock in profits or minimize losses. The exact timing depends on the acquisition process, but once the deal is completed, outstanding contracts are canceled.

Stock Exchange

In a stock-for-stock acquisition, call options are adjusted based on the exchange ratio, which determines how many shares of the acquiring company are issued for each target company share.

For example, if the exchange ratio is 1.5, each share of the acquired company converts into 1.5 shares of the acquiring company. Existing call options are modified to cover the equivalent number of shares in the new entity. While this preserves contract value, it can impact liquidity and volatility.

Traders should monitor the exchange ratio and the acquiring company’s stock performance post-merger, as these factors influence contract value.

Mixed Payment

Some acquisitions involve both cash and stock. In these cases, call options are adjusted based on the cash payout and stock exchange ratio.

For example, if an acquisition offers $30 in cash and 0.5 shares of the acquiring company per target company share, call options are modified accordingly. The cash portion is settled at closing, while the stock portion continues as an adjusted contract tied to the acquiring company’s share price.

Contracts may be split into two components—one settled in cash and the other converted into a new option on the acquiring company’s stock. Traders should review notices from the Options Clearing Corporation (OCC) or their brokerage to understand the specific modifications.

Contract Adjustments for Call Options

Call options do not disappear in an acquisition; they are modified to reflect the new structure of the underlying asset. The OCC determines these adjustments and issues notices outlining the changes.

Modifications may include recalibrating the strike price, altering the number of shares covered, or converting contracts into options on a different security. These adjustments aim to preserve the contract’s economic value but can affect liquidity and pricing.

Strike price adjustments occur when an acquisition changes the target company’s per-share value. If a merger results in a proportional increase or decrease in share value, the strike price is modified accordingly.

For example, if a company’s stock undergoes a 2-for-1 exchange as part of a merger, a $50 strike price would be adjusted to $25 while doubling the number of shares per contract. This maintains the contract’s relative value, though pricing dynamics may shift.

Contract size modifications are also common. Standard equity options typically cover 100 shares per contract, but acquisitions can lead to fractional share allocations. If an acquisition grants shareholders 1.3 shares of the acquiring company per target company share, option holders may receive a mix of whole shares and cash for any fractional amounts.

Sometimes, call options are converted into contracts on a different security. If the target company is absorbed into a larger entity, existing options may be replaced with options on the acquiring firm. This transition can affect implied volatility and bid-ask spreads as traders reassess the new underlying asset.

Early Exercise Possibilities

Traders may consider exercising call options before an acquisition is finalized. While early exercise is rare for American-style options, certain acquisition scenarios make it worthwhile.

A buyout with a large cash component often causes the target company’s stock price to converge toward the offer amount, reducing the likelihood of further price appreciation. This diminishes an option’s time value, making early exercise a way to capture intrinsic value before the deal closes.

Dividend payments can also influence early exercise decisions. Call option holders do not receive dividends, but stockholders do. If an option is deep in the money and the dividend exceeds its remaining time value, exercising before the ex-dividend date allows traders to capture the payout.

Regulatory approvals and shareholder votes introduce uncertainty. If an acquisition faces potential delays or failure, option holders may prefer to exercise and take ownership of shares rather than risk holding contracts that could lose value if the deal collapses.

Expiration or Cancellation of Contracts

When an acquisition is finalized, outstanding call options on the target company’s stock are typically resolved through expiration or cancellation. The outcome depends on the deal structure and regulatory handling.

One common scenario is accelerated expiration, where options are terminated before their original expiration date. This often happens when a merger is set to close imminently, and the OCC issues a corporate action notice specifying that all remaining contracts will be settled based on the final stock price or a calculated cash equivalent.

Holders of in-the-money calls receive a payout equal to the difference between the takeover price and the strike price, while out-of-the-money contracts expire worthless. This forced resolution can disrupt trading strategies, particularly for investors planning to hold positions longer.

Potential Tax Considerations

The tax treatment of call options in an acquisition depends on how the deal is structured and whether contracts are exercised, adjusted, or settled in cash.

Exercising a call option before or during an acquisition establishes a new cost basis and holding period. If the acquired shares are exchanged for stock in the acquiring company, the transaction may qualify as a tax-free reorganization under Section 368 of the Internal Revenue Code. In such cases, the original cost basis carries over, and no immediate capital gains tax is triggered.

If the acquisition includes a cash component, any cash received is typically treated as a taxable gain, subject to short-term or long-term capital gains tax depending on the holding period.

For options that are cash-settled due to an all-cash acquisition or forced expiration, the difference between the settlement price and the original purchase price is taxed as a capital gain or loss. Short-term gains, applicable to positions held for one year or less, are taxed at ordinary income tax rates, which can be as high as 37% in the U.S. Long-term gains benefit from lower tax rates, ranging from 0% to 20% depending on the investor’s income bracket.

If an option expires worthless, the entire premium paid is considered a capital loss, which can be used to offset other capital gains or up to $3,000 of ordinary income per year.