What happens if you sell a put and the company splits or spins off a business?
I'm considering selling FB Jan 2022 puts at the 5 strike and I'd like to know what would happen in the following scenarios.
Scenario #1
Facebook spins off or sells Instagram and/or WhatsApp prior to Jan 2022 and the FB stock price falls below 5.00 in Jan 2022.
Scenario #2
Facebook if forced to "break up" by the government and they reform as several independent companies (new FB, new IG, new WA, new etc...). As what happened with Dow Chemical (CTVA, DD, DOW). The "Facebook" company's stock price falls below 5.00 in Jan 2022.
Thanks for your insight.
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Nothing happens to the option if FB sells off assets. Your contract is for 100 shares of FB, whatever it is worth at expiration. If below 5, your short put will be assigned and you will buy shares of FB.
A spin off is a distribution and existing contracts will be adjusted to reflect the terms of the spin off. The same holds true for a break up.
Corporate actions are examined by an OCC adjustment panel. They decide how options are adjusted on a case-by-case basis. For example, suppose XYZ announces a spin-off of one share of ABC for each share of XYZ that is owned. The number of contracts you own (or are short) will not change and the strike price will remain the same. The option symbol for XYZ will become XYZ1 with 100 shares of XYZ and 100 share of ABC deliverable upon exercise/assignment. Same multiplier of 100.
If there has been a spin off by FB and you are assigned, you'll pay 5 for 100 shares of FB and whatever company(s) was/were spun off (per the terms of the spin off).
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