Tuesday, October 13, 2009

On Georgia Gulf Corp (GGC) Options Contracts

There has been a fair amount of confusion about the GGC options contracts in light of the 25-1 reverse split that took place this summer.

The CBOE put out a report, Research Circular #RS09-285, on this topic:

All GGC options will be adjusted to require the receipt or delivery of: 4 shares of "New" Georgia Gulf Corporation ("GGC") Common Stock. Strike prices will remain the same. The option symbol will change to GCP. Premiums for the adjusted GCP 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 adjustment pertained to all outstanding options contracts through February 2010, which were and are the latest expiration available.

This has been problematic because the 2.5 pre-split option contract represents a 62.5 post-split/"New" price. The result is that the lowest strike puts are deep in the money, which limits the return (as a percentage of the option premium) that one can make if GGC tanks.

What I hope is that new contracts are rolled out soon based on the "New" prices. That is, I would love to be buying $25 strike puts for say $5, which would return a good 4x rather than the 30% that is achievable now with the crummy 2.5 strike options.


eh said...

What I hope is that new contracts are rolled out soon based on the "New" prices.

OK, that makes sense.

But by that time, more people will have caught on to what's happened, or more importantly to what is likely to happen, and then even the new puts will probably be rather expensive, perhaps too expensive to be really attractive. I mean, option writers aren't that dumb, are they?

CP said...

You have to look at these opportunities using expected value (EV) as your one and only metric.

Even though the options are expensive now, the expected value offers a return more than commensurate with the risk.