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At any rate, I think there's some downside risk when things are this good. Buy the ugliness; sell the beauty. (I'm talking about stocks, OK?!)

At the time of publication, the firm in which Willard is a partner was net long Microsoft, Apple and Google, although positions can change at any time and without notice.

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Steven Smith's Blog: Options on Takeovers

Originally published on 11/21/2006 at 2:09 p.m. EST

Given all of the recent merger activity, especially in privately led buyouts whose bids have a large or all-cash component, a reader wonders what happens to the options on the company being acquired.

First, any options that have already been listed will continue to be available to trade like all options. But once the terms of the deal are finalized and the parties have agreed that no new options will be listed, the options that are already in existence or listed, including all long-term or LEAPs, will only be available for closing transactions. That means if you own the option, you will be allowed to sell it; if you are short, you can buy to cover.

In all cases, the options, assuming they are in the money, can always be exercised. What you get will depend on the terms of the deal; each case is different and some can be fairly complicated.

A recent example was Cendant when it spun off some units. Shareholders received a combination of stock in both Realogy (H Quote) and Wyndham Worldwide (WYN Quote) and some cash to boot.

A great place to check on what adjustments have been made -- that is, what rights the option holder is now entitled to -- is the Options Clearing Corp. Web site. You can also call the Options Industry Council at 1-888-OPTIONS.