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# Mergers and Acquisitions: Part II&mdash;Stock and Cash Mergers

10/23/2015 8:00 am EST

Focus: OPTIONS

Alan Ellman

President, The Blue Collar Investor Corp.

As a follow-up to his discussion of how mergers involving cash settlement only do impact covered call and put-selling positions, Alan Ellman, of TheBlueCollarInvestor.com, goes further by outlining how mergers that involve both cash and stock can alter option contract positions.

In Part I of this series, we discussed mergers involving cash settlement only. These events do impact our covered call and put-selling positions.  In this article we will highlight mergers that involve both cash and stock and demonstrate how these corporate events can alter our option contract positions.

Assumptions

Company XYZ is merging into Company BCI and BCI is paying for each share of XYZ, 1/2 share of BCI + \$5.00 per share: 100 XYZ = 50 BCI + \$500.00

The \$500.00 remains a fixed amount despite any change in share price of BCI by consummation of the merger.

Changing Option Symbol

XYZ calls and puts will now trade as BCI1 calls and puts and continue to trade until they expire:

Click to Enlarge

Calculating the Moneyness of the \$25.00 Call Strike if BCI is trading at \$30.00

The aggregate exercise amount per contract (\$25.00 x 100) = \$2500.00 both before and after the merger. We know that when BCI1 is exercised, 50 shares of BCI + \$500.00 is deliverable. If BCI is trading at \$30.00 per share, the current contract value is \$1500.00 + \$500.00 = \$2000.00 or \$500.00 less than the aggregate exercise amount. This means that the call is out-of-the-money by \$500.00.

Recent Example

Eagle Rock Partners, LP (EROC) Merger completed
with Vanguard Natural Resources, LLC (VNR)
Shareholders of Eagle Rock Partners, LP EROC voted on Monday, October 5, 2015, and
approved a proposed merger between EROC and Vanguard Natural Resources, LLC VNR.
Pursuant to the terms of the merger, each EROC Common Unit outstanding immediately prior to the consummation of the merger will be converted into the right to receive 0.185 of a Common Unit of VNR. The merger became effective on Thursday, October 8, 2015.

Pursuant to Article VI, Section 11, of OCC’s By-Laws, all outstanding EROC options shall be
adjusted as follows. On Friday, October 9, 2015, each adjusted Eagle Rock Partners, LP
contract will require the receipt or delivery of: (A) 18 Common Units of VNR; plus (B) cash in
lieu of 0.5 fractional Common Unit of VNR. Premiums for the adjusted Eagle Rock Partners, LP options will continue to be calculated on the basis of a multiplier of 100, i.e., for premium and strike price extensions, 1.00 will equal \$100. The Eagle Rock Partners, LP option symbol will change to VNR2. [Any FLEX series that may exist will be adjusted in a similar manner to the standardized option.]

Discussion

Corporate events like stock splits, special dividends, spin-offs, and mergers and acquisitions usually result in option contract adjustments which impact our covered call writing and put-selling positions. These changes are made to make both option buyers and sellers whole but we still must understand how are contracts are impacting to then allow us to make the best investment decisions. Our brokers will have access to this information or we can call the OCC at 1-888-678-4667 or go online at www.cboe.com and look for contract adjustments.

By Alan Ellman of TheBlueCollarInvestor.com