Option Market and Rights Issues: The Seat Pg and Tiscali Operations

Abstract:     
Among capital increases realized in 2009 by Italian listed firms, two operations drew the attention of the investors and regulators because of the complex architecture of their offering.Tiscali and Seat Pg operations were characterised by the issue of a huge number of ordinary shares and a high dilution effect. This paper investigates the anomalies observed in the option market for those contracts having Tiscali and Seat shares as underlying and the consequences in terms of financial loss for an investor adopting a covered call strategy.

We show that the potential early exercise of the option by the writer in the beginning of the offer period causes a financial loss solely due to the regulatory framework of the right issue, not to market conditions. These losses occur with major evidence in the analysed case because of the high diluition effect, but they potentially affect any right issue of shares that are also underlying of option contracts.

Keywords: Capital Issue, Stock Diluition, Covered Call Strategy

JEL Classification: G11, G14, G32

Accepted Paper Series