what happens to a stock option call when the company is taken over by
another company?  Like lets say I buy call options in company ABC and
it gets taken over by company XYZ before the call expires, what
happens to call and the money you put down to purchase the contract?

Hi dazedandcallfused,

When there is a merger or takeover, options on the stock of the
acquired company are adjusted according to the terms of the deal. 
With a call option, your right to buy the stock is converted to a
right to buy a corresponding quantity of whatever shareholders receive
for their stock.

Say you have options to buy ABC stock and XYZ acquires ABC.  Whatever
deal ABC's shareholders get carries over to your options.  For
example, if you had an option to buy a share of ABC for $1 and the
takeover deal was that every ABC share is exchanged for two shares of
XYZ, after the takeover, you would have an option to buy two shares of
XYZ for $1.

If the transaction between the companies is more complicated (e.g., a
combination of stock and cash), what happens to the option will be
correspondingly more complicated.  But in any case, the exchange where
the option is traded should publish what is going to happen to the
options before it actually happens.

This is just the general principle.  For more details, see the
following references.

Detailed explanation by Frederic Ruffy on Yahoo! Finance
http://biz.yahoo.com/opt/041213/8d5111051ca245d1e132c78748f25db5_1.html

FAQs on splits, mergers, and spinoffs from the Options Industry Council
http://www.888options.com/faq/mergers.jsp

E*TRADE Options FAQ on splits, mergers, spinoffs & bankruptcies
https://us.etrade.com/e/t/kc/oic?id=50015

FAQ answer from the Montréal Exchange
http://www.m-x.ca/invest_particulier_faq_en.php#merger

--efn

---

Clarification of Answer by efn-ga on 11 Jan 2005 07:34 PST

Sorry, I made a mistake.  The organization that posts impending option
adjustments is not the exchange where options are traded, but the
Options Clearing Corporation.  The documents are called "contract
adjustment memos," and you can find current ones on this page:

http://www.optionsclearing.com/market/infomemos/info_memos_form.jsp

Sorry about the error, and thanks for the rating and tip.

--efn