Fixed Dollar Value Collar
Shirts with collars not only look spiffy, but that collar serves another purpose: it protects our neck. Whether we’ve got a scratchy scarf or an abrasive overcoat, that collar acts as a shield protecting some of our more delicate skin.
Fixed-dollar value collars serve the same purpose. When one company acquires another, a fixed-dollar value collar can be put in place to protect the neck-–er, stock value–-of the acquired (Company A) against fluctuations in the stock price of the acquirer (Company B).
Here’s how it works: Company A purchases stock with a short call position and long put position. Until those options expire, the stock is going to stay within a limited and protected value range, regardless of whether Company B’s stock drops like a stone or shoots through the roof. Specific M&A agreements will differ on the value of the stock, the quantity of stock available for purchase, and the ratio of exchange between Company A stock and Company B stock.
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Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
Up Next
What is a put option? A put option is a type of contract that lets the investor sell shares of a stock at a certain price and within a window of ti...