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Occidental Petroleum(OXY)announced plans last week to spin-off its business in California as a separate company and to move its headquarters to Houston. An investor who owns long-dated call options asked what would happen to his position, since the company break-up is scheduled to occur by the end of 2014 or in early 2015, before his calls expire.

The short answer is that existing shareholders and owners of option contracts will not see the economic value of their positions change. The longer answer is that the precise nature of the compensation to existing and potential equity holders depends on precisely how the split occurs and what adjustments the Options Clearing Corporation makes to the existing contracts. OXY hasn't announced specific plans yet, but there's no harm in speculating on how they might split the company based on recent earnings. Twelve trailing month earnings before interest, taxes, and depreciation for the whole company were about $16 billion, according to data from Thomson Reuters. In its press release, OXY noted that the California business EBITDA last year was about $2.6 billion. So we could imagine a distribution of three shares in the new California company for every twenty OXY shares currently held, with a special dividend paid to make up any difference in the value of the new shares.

To receive shares in the new company, call buyers should be prepared to exercise their options before the contracts are adjusted. The best thing to do is to watch for more information from the company and the options exchanges as plans progress. To see how this process works in more detail, here is a representative circular from CBOE discussing a spin-off and change of name for the Sara Lee Corporation in 2012. Some additional examples and discussion along with links to receive adjustment alerts are in the fourth question at this helpful OIC page.

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At the time of publication, Jared Woodard held no positions in the stocks or issues mentioned.