The announcement that a company is buying another is typically good news for shareholders in the company being purchased, because the price offered is generally at a premium to the company's fair market value. But for some call option holders, the favorability of a buyout situation largely depends on the strike price of the option they own, as well as the price being paid in the offer.
A call option affords holders the right to purchase the underlying security at a set price at any time before the expiration date. But it would be economically illogical to exercise the option to purchase the share if the set price were higher than the current market price. In the case of a buyout offer, where a set amount is offered per share, this effectively limits how high the share price will rise, assuming that no other offers are made, and that the existing offer is accepted. So, if the offer price is below the strike price of the call option, the option can easily lose the majority of its value. On the other hand, options with strike prices below the offer price will see a spike in value.
Consider the following real-life event: On December 4, 2006, Station Casinos received a buyout offer from its management for $82 per share. The change in the value of the option on that day indicates that some option holders fared well, while others took hits. Case in point: on that day, options expiring on January 9, 2007, with a strike price of $70--well below the $82 offer price, rose from $11.40 to $17.30, representing a whopping 52% increase. In contrast, those same options with a strike price of $90--well above the $82 offer price, fell from $3.40 to $1.00, representing a staggering 71% loss.
In conclusion, some call option holders handsomely profit from buyouts if the offer price exceeds the strike price of their options. But option holders will suffer losses if the strike price is above the offer price.