Euronext changes rules for Imtech
A lot of discussion in the option market of Imtech. The troubled company with a billion debt will start a rights offering worth EUR 600 million. The offering if fully guaranteed by a consortium of banks. As the current market cap of the company is some modest EUR 200 million, the dilution will be heavy. New rights will be offered with a huge discount, as the banks want to avoid the risk as possible to be stuck with millions of Imtech shares nobody wants.
Arbitrage
As usual, the rights will be trading at a discount and the arbitrage game is on. Sell the shares, buy the rights at a discount and lock in a profit. You won’t be able to borrow the shares as soon as the rights start trading. If you own the shares before the offering, you’ll be receiving rights. But everybody wants to own the shares, without the rights. In-the-money calls start trading at a premium. Be long the itm put and itm call – and exercise the call as soon as the rights start trading.
Short squeeze risk
Another issue is the availability of the shares. The option contracts get a huge contract size, due the recalculation options get a contract size of 400 or even 1000 instead of just 100. When options get a contract size of a 1000, the availability of shares to cover the delta may run out of supply. A short squeeze in Imtech was widely anticipated. The new shares from the offering will take some weeks to arrive.
Other rules
Euronext realized this, and decided to change the rules of the game. Instead of the fixed rulebook for right offerings – the rights will now be seen as a “spin off” company. Options will have a basket of claims and shares as underlying (package method). Investors unaware of the risks have been selling deep itm calls with a big premium, and can keep the profit after Euronext stepped in.
Then again, these new rules can be changed again and can only be seen as guidelines. Difficult to trade without a fixed set of rules.
- Official document by Euronext
first post
good retail investors are protected against their own stupidity, but why wait so long? Some market makers will face big losses due this arbitrary decision from Euronext.
it’s a small company, in trouble, going for a round of financing, why some set of option traders make or lose money in this corporate action is of no consequence to the rest of the world, in short term this is zero sum game for the speculators
‘Investors unaware of the risks have been selling deep itm calls with a big premium’
continuing on this theme, calling these short term option speculators as ‘investors’ is bit more than a stretch, and shouldn’t ‘investors’ be aware of all the risk factors if they are going to dabble in options, specially during a coac
Good action from Euronext as nobody could know what would have happened without it. Market makers could never deliver the huge number of shares unless they paid huge prices which could go up to infinity (like Volkswagen). Will TOM follow these rules? I think Eurex also has open interest in IR3A.
Despite the complaining, this is in accordance with the spirit of the Euronext corporate action policy. In this document it says:
“The methodology detailed in this Policy Document is based on the principle that, when the shares underlying an Option Contract (which has not been exercised) or a Futures Contract become ex entitlement, contracts on such shares should be amended to reflect in economic terms (as far as practicable) a holding equivalent to the ex entitlement shares and the Relevant Entitlement”
Using the package method definitely is in line with this: in economic terms the holding stays the same cum and ex.
And:
“Euronext envisages that, in most situations, contracts will be adjusted in accordance with this Policy Document. However, it should be noted that in certain circumstances this may not be possible or appropriate, and Euronext retains the right to determine how contracts should best be adjusted (if at all).”
You could make a strong case that leaving the option for a short squeeze open is not appropriate, and is a good reason to deviate.
If anything, they should have deviated from the corporate action policy in case of Getronics, as poor old All Options has been arguing in court. But I don’t think you can criticise Euronext too much for this one, it’s all with the intention of keeping an orderly market.
Hey, I wouldn’t have been surprised if they had not done this and people would have exercised their ITM calls that the AFM would go after those people for market manipulation…
this european situation is so messy, how do coac gets handled in US?
coac = corporate actions
Changing the rules without informing stakeholders in time (note: after more than 100.000 options have been traded) is an incredible undemocratic way of decisionmaking that imho could not hold in front of the Court.
Especially since Euronext after the last case against AllOptions should have known better….
I’m pretty sure any court that looks at the facts will not side with the “investors” who tried to benefit from an artificial short squeeze they intended to create themselves.
unlike in US, Europe/UK has much more spirit of law rather than 10,000 pages of rules book, so being pedantic wouldnt win you the case
and why is someone defining what a coac is ?
Despite the fact that now after the claim emission option owners will feel less free to trade in claims, i do not really see the problem in terms of succeeding the claim emission. Quite the contrary it looks as if in this reasoning the succes of the claim emission looks m,ore possible, because option players will have to keep their shares packaged together with the claims.
for the uninformed, what is ‘claim emission option’, is that what euronext is trying to do, to remove the rights claim from a stock obtained by exercising calls?
In the US things are usually handled with a new basket consisting of the rights/newly issued shares or cash components and the current underlying. The basket will get a new underlying symbol. There are no adjustments with a rfactor.
The difference in thinking is that European adjustments always assume a reinvestment into the stock when a capital adjustment happens, the US treats cash as cash. In general I think that it is easier to perform US style adjustments.
then why do Europeans have to do this the difficult way? don’t they have enough problems in the continent as it is
To confuse the yanks so much that they leave again.
http://www.amsterdamtrader.com/2014/09/rgm-europe-closing-doors.html
eh, why would yanks wanna waste their time amongst the fighting greeks and germans?
talk about kicking out yanks
http://www.bloomberg.com/video/ackman-s-pershing-square-turns-to-amsterdam-seeking-2b-ipo-9~g3VmPJSRi56H3owb3I6Q.html
you literally can’t make this stuff up
Totally off topic. Alibaba, nyse live stream. Free publicity for IMC: the IMC logo all over some monitors standing in front of the camera 🙂
Yeah they really need free publicity
good one
how can they monetize publicity, duh?
get more candidates ?
get more visibility as a MM ?
I suppose that they don’t make money just from the spread… or? can’t a MM get money from an issuer for providing liquidity for it’s illiquid products?
getting visibility on nyse alibaba ipo isnt going to get you anymore candidates, however treating your employees good would get you lot more, all publicity is not good publicity mate
how does more visibility as mm help?
how else do they make if not purely from spreads?
an issuer does pay for liquidity provision, that’s why the ipo’s are supported by the banks peddling the shit, how are you trying to insert imc into that, there is one place which does support imc’s liquidity provision and that’s the exchange providing rebates, ironically they are already sitting on nyse’s floor and thus no need for publicity, they have arrived!
What do people think about Jump?
http://sniperinmahwah.wordpress.com/
5mln for a tower seems like a lot.
someone has got way too much time on hand to spend investigating on all of this
So, rights have detached, what is going on?
so who’s dying in Imtech?
has somebody printed a lot of mios for someone to die on the other side?
a great day for us haha
sure, go on, what’s your ball size?