Non-Standard BAC Option and Cash in Lieu
I am confused about the difference between standard option and non-standard option. I originally thought that non-standard option was like European style option which could be exercised on expiration day only. If that was the case then the risk of writing this kind of option should be lower and the premium should be lower. But I found it is exactly the opposite. See the following July Bank of America options with strike price at $11. The premium for the non-standard option is a lot more. I was thinking selling the non-standard put option would make me a lot more money than the standard one.
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Well I did some research and found I was wrong. Look at the following when I open up the JUL 11 PUT OPTION. It says “Non-Standard Option | $13.71 cash in lieu of shares, 85 Shares of BAC”..
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This non-standard option is a result of Merger between Bank of America and Merrill Lynch. This non-standard option was originally Merrill Lynch option. Since the merge or acquisition between Bank of America and Merrill Lynch was 0.8595 shares of Bank of America common stock for each Merrill Lynch common share, a Merrill Lynch option contract (100 shares) became Bank of America option contract with 85.95 shares. Because the fraction share can not be traded Bank of America use cash to pay Merrill Lynch share holder during the merger. And the $13.71 cash reflected the fraction share conversion.
If you sell this put options, yes you could collect a lot more than selling standard one, but when the buyer exercise the put option and sell you BAC shares they only need to deliver 85 shares of BAC plus $13.71 cash to you to fulfill the contract. So yes you get a lot more upfront by selling them but you take the risk of getting a lot less when the put option contract is fulfilled. Risk and return are always proportionate
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