With the recent rise in share prices, we're beginning to see a pickup in merger and takeover activity. And who knows, stocks may start splitting on a regular basis again in the not-too-distant future. This week's question addresses how the options market adjusts to changes in an underlying company's structure or share price.

I was thinking about buying some T options. However, when I checked the quotes I get three different symbols for the Jan 2004 25 Calls. I have +keuae, +tae and +titae. I tried to find out what they mean but couldn't find anything. I'm sure there's gotta be a difference. What is it?? I would be very thankful if you could send me a link. Thank you very much, Roman.

While the specifics surrounding AT&T ( T) maneuverings were the result of a falling market and an essentially floundering company, it's a great working example of what happens to options when the underlying equity effects a spinoff, spinout or split -- it's performed all three during the past three years. The impact on related options is basically applicable to all situations.

The General Rules

The concept related to stock splits is that an option's aggregate exercise value always remains the same. If XYZ Corp. is trading at $60 and announces a 2-for-1 split, the owner of one 60 strike (or put), regardless of the month, gets two 30 strike calls (or puts) when the split occurs.

In the case of a fractional split, such as a 3-for-2, the 60 strike becomes a 40 strike on 150 shares; each still represents a $6,000 aggregate value of the underlying.

This idea essentially answers the question:

"I bought 500 shares of stock and wrote five November calls against it. The stock has split 4-for-3, am I now short two of five calls? T.D."

My best, short answer is no. I'll take TD's caginess in not revealing his actual holdings to reiterate that you should always check with your broker regarding the implications of your specific position. But again, basic division would most likely be applied, meaning each contract now represents 133 shares. Assuming you held the underlying stock -- which would now be 665 shares -- they will all be covered by the five calls.

Acquisitions or mergers will usually result in the outstanding options being adjusted to require delivery or securities payable to holders of the security after the deal is completed. There's a good example on the CBOE Web site. But when cash is involved (as has been the case in the most recent deals), options will be adjusted for the cash delivery -- the expiration date is accelerated to fall before the conversion of the underlying is due to receive the cash, so the options lose their time premium. In-the-money holders must exercise the option prior to this date or risk it expiring worthless. For more details, look at the Characteristics and Risks of Standardized Options booklet, specifically Chapter 3 on the CBOE Web site.

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