Help understanding TSLA1 (adjusted) options

[Yonki]

I'm trying to figure out how my TSLA1 Jan 2019 $30 (originally standard SCTY $30) options are comparing to equivalent standard TSLA options. I expect the spread to be wider since they'll be less heavily traded, so I wanted an idea of how much wider.

Here are my best calculations:

Does that look correct? The TSLA bid/ask is nicely centered inside the converted TSLA1. Not crazy about the additional $6 spread on either side, but it is what it is. Hopefully by Jan 2019 $6 will be rounding error.

 

[Crowded Mind]

I'm trying to figure out how my TSLA1 Jan 2019 $30 (originally standard SCTY $30) options are comparing to equivalent standard TSLA options. I expect the spread to be wider since they'll be less heavily traded, so I wanted an idea of how much wider.

Here are my best calculations:
View attachment 210487
Does that look correct? The TSLA bid/ask is nicely centered inside the converted TSLA1. Not crazy about the additional $6 spread on either side, but it is what it is. Hopefully by Jan 2019 $6 will be rounding error.

Your bid/ask is wrong. Divide by 0.11.

 

[MikeC]

Is it not:

Bid = 2.60/0.11 = $23.64
Ask = 4.00/0.11 = $36.36

Would make sense that the bid and ask are both lower, as TSLA1s have lower liquidity and are less attractive. I know @neroden has figured all this out. Btw, that $4 ask is me offering one contract yesterday, I think otherwise it would be $0.10-0.20 higher.

 

[neroden]

Yes. Divide all TSLA1 prices (both option and strike) by 0.11 to get the equivalent TSLA prices.

The spreads are now ridiculously high on TSLA1 options. You'd actually expect bid to be lower and ask to be higher than on TSLA options if the strike price were the same. That ask converts to $36.36.

You'd expect the bid and ask for the TSLA1 $30 call strike to be a bit lower than the quoted bid and ask for TSLA $270s, because the TSLA1 option has a strike price (effectively $272.73) which is further out of the money. But the massive spreads usually dominate that effect.

 

[Yonki]

Thanks guys. Is there an expectation regarding spread over the next 2 years? Might it tighten up?

 

[Yonki]

For completeness sake, here's the corrected spreadsheet:

 

[neroden]

Thanks guys. Is there an expectation regarding spread over the next 2 years? Might it tighten up?

For TSLA1? No. It'll get wider; the market will get thinner as people close their positions and nobody opens replacement positions (new positions will generally be opened in TSLA).

I did tell people before the merger that if they were holding SCTY option positions, don't expect to close them by purchase/sale without paying a premium to the market maker.

However, for many types of options trades, you simply don't have to worry about it.

If you were bullish on TSLA you might have long calls or short puts:

For a long call, wait until it's in-the-money; you'll get at least the inherent value by selling it (if it dropped below the inherent value someone would bid it up because of the arbitrage), or you can execute it. (If you think it'll never be in the money, well, you just have to take what the market maker offers, and you lose out on the spread, oh well.)

For a short put which you expect to be out of the money, wait until expires worthless, no payment to the market maker. Or if TSLA goes high enough and it's deep out of the money, you'll be able to buy it back for pennies (I did this for a couple of my positions). If you think it'll be in the money, and it was cash-secured, prepare to increase your position in TSLA stock at that strike price.

If you were more bearish you might have long puts or short calls:

For a long put, wait until it's in-the money; you'll get at least the inherent value, or you can execute it. (If you think it'll never be in the money, well, you just have to take what the market maker offers, and you lose out on the spread, oh well.)

For a short call which you expect to be out of the money, wait for it to expire worthless, no payment to the market maker. Or if TSLA goes low enough (surrrrre) and it's deep out of the money, you can buy it back for pennies. If you think the short call will be in-the-money, and it was covered, you can simply allow your TSLA stock to be called away from you (sell it at the strike price); you can always buy replacement stock.

Remember what options *are*. The market makers have (as expected) made it more expensive to close positions in "weird" options like TSLA1 by purchase or sale, but closing them by execution or expiration still costs the same as it always did.