Kelly,
The writer of the call is responsible to the holder for all splits, spinoff's etc. If Pepsi does a split one for one, then you will also have 100 shares of TRICON. The split is invisible to you essentially. If the writer of the call wrote it naked, as opposed to covered, then he/she will have to buy the requisite number of shares of TRICON as well. If the writer of the call did so covered, then he/she has little to worry about. I may be wrong, but I don't believe the strike price of the original option will change - i.e., the pepsi option will still have the 40 dollar stike price. However, they might "adjust" it based on the original share value. Follow me?
How do they adjust the cost of the option? Well, that's a good question! Supposedly, it is based on the current price of the underling stock, the strike price, time value and volatility. Your guess is as good as anyones.
I have written calls (covered) against my long term stocks for some time now. It is one way to increase your return while holding the stock. And since 3 out of 5 options expire worthless - there isn't too much risk.
Regards,
Gary |
