Worthless call option with unrealized loss

[Guest JS65]

New to options and made a big mistake..

Do I have any options (pardon the pun) to realize this loss?

I initially opened a vertical call spread (bought lower-strike, sold higher-strike). Then later stock dropped, and I "legged out" of the short position by cheaply buying back the short calls. Unfortunately, the stock never recovered, and only kept dropping, and had to do 20-1 reverse split. My remaining long leg is pretty much worthless. In total, the whole position was only hundreds of dollars of investment (the spread), but when I closed the short leg, I supposedly realized thousands of dollars in gains. Now I am trying to close out the worthless long leg, but no one will buy it even as Market order or $0.05 option premium (the minimum increment). Option expires in 2018, so I feel like I am stuck paying realized gains this year, while carrying this unrealized loss till 2018 expiration!!

The option is GALE Jan 2018 adjusted options with 5 shares (instead of 100) as deliverable. One thing I do not understand is if my original call (before split) was 1.5 strike price (and 100 share deliverable), now that it is adjusted to 5 share deliverable, what happens to the strike price? It still shows $1.5 in my brokerage, so shouldn't I be able to exercise by paying $1.5 per each of 5 shares, then sell 5 shares at ~$2.5 each, which is current market price after split? What am I missing? I don't think they can expect both a 1.5*20 strike and a 100/20 deliverable as that would be 20*20 adjustment. 

[greenspan76 302]

When GALE did the reverse split, the OCC (Options Clearing Corporation) issued memo #40066 explaining what happens with GALE options, but it is a little confusing if you don't know what you're looking at. Basically, any option opened prior to the reverse split now trades under the GALE1 symbol instead of GALE. All GALE1 options are calculated based on a 100 multiplier ($1 of option premium = $100), but the contract only delivers 5 shares of the new post-reverse split GALE. So, if you held a call option that had a $1.50 strike before the reverse split, it will still have a $1.50 strike now under GALE1 and you would pay $1.50 x 100 = $150 for delivery of 5 shares of GALE, which you could then turn around and sell for $2.60 x 5 = $13.

 

You might instead be able to sell the options for a negative amount - in other words, pay someone to buy them from you. But, depending on your broker, its possible your brokerage software won't allow the order - not really sure on that part.

Edited December 9, 2016 by greenspan76
clarification

[Guest JS65]

Ignore my last sentence

On 12/8/2016 at 10:57 AM, Guest JS65 said:

14 hours ago, greenspan76 said:

When GALE did the reverse split, the OCC (Options Clearing Corporation) issued memo #40066 explaining what happens with GALE options, but it is a little confusing if you don't know what you're looking at. Basically, any option opened prior to the reverse split now trades under the GALE1 symbol instead of GALE. All GALE1 options are calculated based on a 100 multiplier ($1 of option premium = $100), but the contract only delivers 5 shares of the new post-reverse split GALE. So, if you held a call option that had a $1.50 strike before the reverse split, it will still have a $1.50 strike now under GALE1 and you would pay $1.50 x 100 = $150 for delivery of 5 shares of GALE, which you could then turn around and sell for $2.60 x 5 = $13.

 

You might instead be able to sell the options for a negative amount - in other words, pay someone to buy them from you. But, depending on your broker, its possible your brokerage software won't allow the order - not really sure on that part.

Thank you, I believe they reject wrong-sided prices (debit for sale orders, credit for buy orders), so don't think that would work. Would it be legal to find a friend (not family member) to place a buy order at my sale price?

Is there any concept of an Option certificate hard copy like there are stock certificates?

[greenspan76 302]

Well, like I said, you can always exercise, then sell, but you're taking the risk of an overnight gap-down plus you're paying commissions on the whole thing. I don't really know about the option certificate - I've never heard of it, but that doesn't really mean it doesn't exist.

 

As far as taxes, I won't give any advice, but I'll say this: Assuming you're in the US, there is a law the IRS uses called Section 1092 that deals with offsetting positions. It was created to stop people from structuring trades so they recognize losses, put off gains that are related to those losses. It is possible that it could be used the other way around, but again, I don't know and advise that you talk to your CPA about it. Also, any trades that qualify as Section 1092 trades between related persons are treated as though they were made by you. If you want to read more about the IRS rules on offsetting positions, just look up Pub 550 (the pub refers to trades as straddles when they positions are offsetting, even if they're not technically straddles)

Edited December 10, 2016 by greenspan76