Many traders will remember the great trade in Getronics options early 2005. A smart fella found a loophole in Euronext’s Corporate Actions Policy with regard to a reverse stock split in penny stock Getronics.

Contract size 12

Some options existed with a tiny block size of 12, called the GTO (Getronics Old) class. A left-over of an earlier claim issue. In a 7-1 reverse stock split the exercise prices would be adjusted as well as the block size. And 12 divided by 7 gives 1,7 – and was rounded up to an underlying block size of 2. This made a lot of difference on the price levels of especially the deep in-the-money puts.

Iain did his homework

Iain Somers did his homework, checked the rules and bought a pack. Rest of the market realized what was going on and started buying too. There was only one firm selling to the rest of the market. All Options reasoned an option could never be worth more than parity. Well, it can. Sold 71.000 puts and lost 2.5 million. After years and years of procedures between Euronext and All Options the show has come to an end now. At first court ruled in favor of  Euronext, then a little bit of both and finally Euronext won.

Different legal world

Apart from the loss on the trade, the costs for lawyers will have been very high. It’s not very complicated stuff for insiders, but that doesn’t count for the rest of the world. The final (Dutch) ruling doesn’t really get the essence of delta neutral trading or the difference between calls and puts I guess :

“4.3  All Options heeft (voor eigen rekening) opties zoals hierboven bedoeld geschreven en verkocht. Hiertegenover hield zij geen aandelen in Getronics die, bij uitoefening van de opties, aan de rechthebbende konden worden geleverd.”

The court is confused. It says All Options sold the options, and All Options didn’t hedge it with a long stock position in Getronics. Stocks which could be delivered to the owner of the options on assignment. Back to school, dear judge. You don’t sell puts and hedge it with long stocks. Court confuses calls with puts. Quite basic stuff. This confusion doesn’t really have an impact on the course of events ; but it’s strange anyway.