I occasionally write calls against ProShare ETFs in my account and while checking out Jan prices noticed it’s very difficult to detect adjusted options. In June 2006 I wrote two detailed articles on the subject, but here’s the quick information:

Consider QID, the ultra-short QQQQ ProShare ETF. In December there was a distribution of approximately $9.50 per share. Many short options had such large distributions. Options bought or sold prior to the distribution reflect the cash component of the declared dividend. Once this distribution is made, the shares no longer reflect this distribution, so new option series are created to reflect the value of the existing shares. The Options Clearing Corporation also needs to adjust all of those existing options to reflect the cash distribution as part of the underlying options package. So now there are two sets of options available per strike.

The Bottom Line

If you are selling calls on an ETF that made a large cash distribution in December and notice two sets of call options available per strike, the higher premium calls require you to deliver 100 shares plus the distribution. In the case of QID, that would be 100 shares of QID and about $950.00 cash.

In addition, a 60 strike call is in the money when QID is trading at 51.50 (60 – 9.50 cash per share). So don’t assume you don’t have to worry about being called out of those shares (and cash) on expiration weekend. If it seems too good to be true, it probably is.

Please see the following articles for much more detail regarding adjusted options:

Analytical Toolbox: Know Your Risk – Adjusted Options, Part 1 (#15151, June 29, 2006)
Analytical Toolbox: Know Your Risk – Adjusted Options, Part 2 (#15158, June 30, 2006)

Down the road this will be less of an issue once the new option symbol format is rolled out (Options Symbology Initiative), but for now, seller and buyer beware.


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Clare White
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
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