Bryan Perry

Avoid This Simple Mistake When Trading LEAPS

by Bryan Perry   01/12/09

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Earlier in the summer, he wanted to buy the TEG Jan 45 Calls, as he expected TEG's stock price to surpass $45. Well, the corresponding ticker that appeared on his brokerage's Web site for the calls was OTGAI.

My friend didn't worry about the root of the ticker being different than TEG because he knew about LEAP conversions and just assumed that the call hadn't been converted yet.

So, he waited and waited, and one day he noticed that there was another set of TEG Jan 45 Calls that appeared on his broker's Web site with the ticker TEGAI, which he assumed was the new converted LEAPS ticker.

But the two tickers had vastly different bid and ask prices. So, he called his broker to find out why his Jan 45 calls were trading at just pennies, while the other Jan 45 calls were valued at nearly $1.

After deducing that the OTGAI calls were not merely a LEAP that had yet to be converted, my friend started digging deeper.

A trip to the Options Clearing Corp.'s Web site revealed that, while the TEGAI calls did, in fact, correspond to Integrys Energy Group, the OTGAI calls corresponded to the Peoples Energy Corp.!

Several years ago, Integrys acquired the Peoples Energy Corp. (former ticker OGT). At the time of the acquisition a few years back, Integrys took on People's LEAPs, which are what my friend bought -- notthe TEG January calls that he intended and expected.

So, while TEG is the parent, the underlying ticker is technically OGT. In simple terms, OTGAI is a non-standard option.

With the adjustment for the merger, the OGT call contract entitles my colleague to 82 shares of TEG, if he wished to exercise. Since he doesn't want to exercise, to determine the strike price that puts the OGT Jan 45 calls in the money (ITM), he was instructed to multiply the $45 strike price by the typical 100 shares to get 4,500. Then, divide the 4,500 by the 82 shares, which equals $54.88. That is the price that TEG will need to hit before the calls are ITM.

So, in effect, because of the non-standard nature of the option, what my colleague thought was a TEG Jan 45 call is actually an OTG Jan 54.88 call.

It just proves that, with options, you can be in the right place at the right time and still run into problems. But more than that, it underscores the importance of double-checking your ticker symbols in at least two trusted platforms -- perhaps the OCC, as well as your online broker.

Fortunately for my friend, it was a fairly innocuous mix-up, but here's hoping you can learn the lesson without getting "ticked" off about the consequences.

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Bryan Perry is the editor of Tactical Trader. To learn more about him, read his bio here.