Two points on what you migh tbe missing - 2nd one more relevant.
1) The "turnout adjusted number of shares" you`re writing about are misleading since as far as I understand, a failure to show up i scounted as a "no". That`s the reason AMC can`t get even simply things approved any more - too many retail investors that don`t turn out to vo…
Two points on what you migh tbe missing - 2nd one more relevant.
1) The "turnout adjusted number of shares" you`re writing about are misleading since as far as I understand, a failure to show up i scounted as a "no". That`s the reason AMC can`t get even simply things approved any more - too many retail investors that don`t turn out to vote, irrespective of the topic. But this shouldn`t change the expected outcome of an approval.
2) ...and this might get weird now. A key part of your thesis is that you somehow can short AMC with reasonable risk, and you described how to do that via put options. However, this makes the assumption that the strike price does not get adjusted. But: Some significant corporate event can lead the OCC to adjust the option contract in order to guarantee smooth trading, e.g. through adjusting the strike price. One of the coporate actions that can lead to that sort of adjustments are stock splits (see e.g. https://www.fidelity.com/learning-center/investment-products/options/contract-adjustments) Yes, I know, technically the split has already happened through the introduction of APEs. But to be sure, I think one would have to wait until AMC officialyl declares the date of the vote (then they need to inform the OCC), and close to the annoucnement of that date. the OCC would publish a memo (https://infomemo.theocc.com/infomemo/search) on changes in the options contract, if there are any.
Obviously, I might be totally off with this point, let`s see what you think.
Yes the options will get adjusted (less shares, higher strike) because of the reverse split - but what is the issue with that? Your stock+put position will still net-off
In my eyes *both* lead to changes in the underlying options contract, but only i) has the consequence that the downside is not the +2.5% described by Andrew, but actually leads to a loss in a downside scenario. Part ii) does not affect the trade as you write.
I`m curious to see and learn about this, therefore here are more details - would be grateful to hear from someone more sophisticated than me what you think:
For simplicity, I will use the prices as they were when the artivle was written. I`ll also assume that we still have one APE per one AMC share, i.e. effectively a 2-for-1 split. Yes, it`s more APE shares now becuase of their ATM action - but the same logic still holds with more APEs.
Buy 100 APEs at ~1.9$, and 1 put option contract (that gives you the right for selling 100 APCs at 4$ each) for 200$ premium, 4$ strike.
Effect of i): The 2-for-1 split leads to the strike prices adjusted downwards to 2$ (4$ divided by split ratio). So you now spent 390$ for the 100 shares + put contract - but it`s not worth 400$ any more, becuase the strike has been adjusted. To make use of the put, the price of one AMC would have to fall below 2$.
Note also: Your contract is now good for 200 AMCs becuase the contract multiplier gets adjusted as well, but this won`t change the calculation above.
But will the OCC really adapt the strike for a stock split that technically has already happened?? I don`t know - and this is what I had meant above.
As you wrote correctly, the reverse split doesn`t change the scenario: Effect of ii) new strike price: 20$ (2$*10, assuming i) holds), contract now covers right to sell 20 shares of AMCnew. You now hold 10 shares of AMCnew plus the contract with strike 20$ for which you paid 390$. In the absolutely worst case, you now would exercise this put which would give you 200$, which would lead to a loss of 190$ on the 390$ you spent.
So in summary, the crucial point is: does i) lead to adjustments or not...?
Again: I might be totally off with this point, let`s see what you think.
This is not correct - the options will adjust properly to reflect the exchange ratio and the split. Ultimately instead of delivering 100 AMC shares vs. receiving $400, you would deliver 10 shares of post split AMC vs. $400 - the OCC adjustment will ensure that you deliver whatever the adjusted underlying security is vs. the same cash amount (no impact on economics).
That said, there is certainly risk to the trade - just don't think it's related to the options contract adjustment.
This is only true if you solely consider the reverse split (ie part ii) above). If I) is considered, you don’t get the 10 shares at 40usd but 20 shares at 20usd strike.
So you also seem to assume that the occ does not take the split into account - what makes you so sure about that?
All the exchange ratios I used are the right ones as per the exchange offer.
Yes. @sck400 you have the right instinct to double/triple check everything, especially when it relates to options, but I invite you to check historical adjustements for corp actions/share class conversions on the occ website: https://infomemo.theocc.com/infomemo/search
Two points on what you migh tbe missing - 2nd one more relevant.
1) The "turnout adjusted number of shares" you`re writing about are misleading since as far as I understand, a failure to show up i scounted as a "no". That`s the reason AMC can`t get even simply things approved any more - too many retail investors that don`t turn out to vote, irrespective of the topic. But this shouldn`t change the expected outcome of an approval.
2) ...and this might get weird now. A key part of your thesis is that you somehow can short AMC with reasonable risk, and you described how to do that via put options. However, this makes the assumption that the strike price does not get adjusted. But: Some significant corporate event can lead the OCC to adjust the option contract in order to guarantee smooth trading, e.g. through adjusting the strike price. One of the coporate actions that can lead to that sort of adjustments are stock splits (see e.g. https://www.fidelity.com/learning-center/investment-products/options/contract-adjustments) Yes, I know, technically the split has already happened through the introduction of APEs. But to be sure, I think one would have to wait until AMC officialyl declares the date of the vote (then they need to inform the OCC), and close to the annoucnement of that date. the OCC would publish a memo (https://infomemo.theocc.com/infomemo/search) on changes in the options contract, if there are any.
Obviously, I might be totally off with this point, let`s see what you think.
Yes the options will get adjusted (less shares, higher strike) because of the reverse split - but what is the issue with that? Your stock+put position will still net-off
Thanks for your answer - but I think what you`re describing is incomplete.
There are *two* distinct corporate actions that shareholders will vote on in the exchange offer (https://www.bamsec.com/filing/110465922129353?cik=1411579): i) the conversion of APE into AMC, ii) a reverse split at 1:10 ratio.
In my eyes *both* lead to changes in the underlying options contract, but only i) has the consequence that the downside is not the +2.5% described by Andrew, but actually leads to a loss in a downside scenario. Part ii) does not affect the trade as you write.
I`m curious to see and learn about this, therefore here are more details - would be grateful to hear from someone more sophisticated than me what you think:
For simplicity, I will use the prices as they were when the artivle was written. I`ll also assume that we still have one APE per one AMC share, i.e. effectively a 2-for-1 split. Yes, it`s more APE shares now becuase of their ATM action - but the same logic still holds with more APEs.
Buy 100 APEs at ~1.9$, and 1 put option contract (that gives you the right for selling 100 APCs at 4$ each) for 200$ premium, 4$ strike.
Effect of i): The 2-for-1 split leads to the strike prices adjusted downwards to 2$ (4$ divided by split ratio). So you now spent 390$ for the 100 shares + put contract - but it`s not worth 400$ any more, becuase the strike has been adjusted. To make use of the put, the price of one AMC would have to fall below 2$.
Note also: Your contract is now good for 200 AMCs becuase the contract multiplier gets adjusted as well, but this won`t change the calculation above.
But will the OCC really adapt the strike for a stock split that technically has already happened?? I don`t know - and this is what I had meant above.
As you wrote correctly, the reverse split doesn`t change the scenario: Effect of ii) new strike price: 20$ (2$*10, assuming i) holds), contract now covers right to sell 20 shares of AMCnew. You now hold 10 shares of AMCnew plus the contract with strike 20$ for which you paid 390$. In the absolutely worst case, you now would exercise this put which would give you 200$, which would lead to a loss of 190$ on the 390$ you spent.
So in summary, the crucial point is: does i) lead to adjustments or not...?
Again: I might be totally off with this point, let`s see what you think.
This is not correct - the options will adjust properly to reflect the exchange ratio and the split. Ultimately instead of delivering 100 AMC shares vs. receiving $400, you would deliver 10 shares of post split AMC vs. $400 - the OCC adjustment will ensure that you deliver whatever the adjusted underlying security is vs. the same cash amount (no impact on economics).
That said, there is certainly risk to the trade - just don't think it's related to the options contract adjustment.
This is only true if you solely consider the reverse split (ie part ii) above). If I) is considered, you don’t get the 10 shares at 40usd but 20 shares at 20usd strike.
So you also seem to assume that the occ does not take the split into account - what makes you so sure about that?
All the exchange ratios I used are the right ones as per the exchange offer.
Yes. @sck400 you have the right instinct to double/triple check everything, especially when it relates to options, but I invite you to check historical adjustements for corp actions/share class conversions on the occ website: https://infomemo.theocc.com/infomemo/search
Thanks - I had posted this site already in my 1st post ;-)
The conversions I wrote about all come from recent examples. What of the things I outlayed above is wrong in your eyes?
i) is not a split