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Stock splits carry with them special concerns for options traders. In Thursday’s article, we explored some basic split types and their impact on positions involving either Calls or Puts. In today’s piece, we’re picking up with a 3-for-2 split in Brookfield Asset Management () and working through the associated math to remove any mysteries that might be present.

For holders of Brookfield Asset Management options on June 1, a 3-for-2 or 1.5-for-1 stock split was going to make their positions look slightly askew the following Monday on June 4th. In Thursday’s article we left off posing the question of what would happen to a +3 Call position. Without the elves at the Options Clearing Corp and our brokerage putting +4.5 Calls into our accounts, which they won’t, something would have to give. And something does of course. In this “odd” split situation, it’s the multiplier beneath the surface which keeps our aggregate value or cost basis in check.

Let’s take a look at an example position in BAM Calls, before and after its split, to better appreciate the mechanics. Let’s assume a trader has purchased +3 July 65 Calls for 1.50, which represented the mid market close on June 1. The aggregate value is 3 x 1.50 or $450 for the position. On June 4, if one were to pull up an options matrix on BAM, they’d find that the July 65 strike had been converted (65 / 1.5) into the July 43.37 Strike. Further, if the Calls closed at 0.80 s by day’s end. That represents a loss of 0.20, as an unchanged value would be 1.00 (1.50 pre split / 1.50). At this point, there shouldn’t be any problems with the math involved. However, some scratching of the head over a 0.20 price shaving in the options, with BAM stock down just 0.14 on the day, is another situation / potential problem altogether.

A loss is never fun, even if it’s still an unrealized and tolerable one in the scheme of things. However, in the case of BAM, if the same positioned trader pulled up their trading account and didn’t know any better, by looking at the number of contracts and the P & L for the day; they’d likely need an aspirin as well. The reason being, they’d see the account still maintained +3 Calls, but was down -$60 for the session. How’d did the Call premium drop from 1.50 pre-split to 0.80 post split, the contract count remain the same, but only result in a loss of $60 bucks?

The answer is the multiplier involved. Since this type of odd split doesn’t allow contract adjustments due to the possibility of non-whole numbers being involved, the new premium levels must be multiplied by 1.50. In this instance, 0.80 x 1.50 = 1.30; which when multiplied by the three contracts ’still’ in inventory we come up with an aggregate value of $390. With an initial cost basis of $450, by finding the difference of the two, we come up with the $60 P & L swing.

Hopefully the process of what happens to existing option positions in front of a stock split is clearer. Additionally, as it relates to those “odd” situations, if traders are looking to open up a position and the strikes do appear funny looking, check with your broker as to the pricing involved, before acting. Generally, new classes of options will be rolled out with standard strikes and multipliers of 100 shares per contract; and that’s where fresh trader interest will likely be, if any.

Finally, if you do find yourself needing to close out an adjusted (pre-split) position, make sure the option code of your inventory matches what you’re trying to exit, as the old symbol code will have changed if new options were listed. Otherwise, some mostly easy math could turn into a financial problem not so easily handled. If questions are still unanswered or more details wanted, traders can turn to the Option Industry’s Council website (888options.com) or my forum at Optionetics.com.

Visit the «www.investors.com» for an extensive list of option-related terms.

The observations provided are not investment advice or a recommendation, the suitability of which is considered the responsibility of the trader.

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When you think of oil, you think of the Middle East. But our neighbor to the north has the second-largest oil reserves in the world behind Saudi Arabia. Canada boasts being the world’s third-largest producer of natural gas and ranks ninth in crude oil production.

Canadian oil production is projected to grow from 2.6 million barrels a day in 2006 to 4.6 million barrels per day by 2015 and to more than 5.3 million by 2020. That’s according to the June 2007 crude oil forecast report from the Canadian Association of Petroleum Producers.

CAPP attributes most of the growth to increasing production from the oil sands, which have only begun to be tapped.

Claymore Securities aims to tap into Canada’s rich reserves with the Claymore/SWM Canadian Energy Income Index () ETF, launched July 3.

It combines 29 Canadian royalty trusts and oil sands producers that have been screened for profitability, liquidity and production growth.

Royalty Trust

A royalty trust is a corporation that’s structured like a real estate investment trust or REIT. A high percentage of the profits are passed on to shareholders as dividends.

Oil sands are a mix of bitumen, a heavy tar-like oil, sand, water and clay. Unlike regular crude oil, it has to be mined, processed and blended into synthetic crude oil and diesel fuel.

Suncor Energy () accounts for 7.3% of assets.

It reported that oil sands production averaged 225,000 barrels of crude per day as of the end of June. It plans to increase production to 265,000 barrels per day this year and more than half a million barrels a day by 2010 or 2012.

Other Pursuits

Suncor is also engaged in energy exploration and refining. And it’s trying to be a major player in renewable energy. It runs Canada’s largest ethanol plant, which can produce as much as 200 million liters of ethanol annually. It’s building four wind-power projects that are set to be up and running by the end of this year.

But analysts polled by Thomson Financial expect sales to decline the next four quarters. Earnings are also expected to slow down.

Another major holding that trades in the U.S., Imperial Oil, () makes up 5.8% of assets. It bought back 47.1 million shares for about $2.0 billion as of mid-June. In addition, it plans to buy back up to 5% of its outstanding common shares over the next 12 months. That’s relatively significant considering Exxon Mobil () owns 69.6% of total shares.

Imperial claims to have more than 1.6 billion barrels in proven reserves and 12 billion unproven barrels. It sells gas at about 2,000 Esso stations located throughout Canada.

Sales growth declined the past five quarters. Earnings growth tapered off from 96% year over year to 5% in Q1.

Key commodities ended U.S. trade Friday with significant gains to the week’s run, with copper closing almost 4% up after four sessions and oil nearing last year’s record price.

Corn, arguably the most-watched agricultural commodity now, jumped 3% in Friday’s session alone as weather forecasters reversed last week’s rain predictions, saying they expected a hot and dry weekend in the U.S. Midwest corn belt.

Gold was the only laggard, closing just above a half percent up for the week.

Copper for September delivery at the New York Mercantile Exchange’s Comex division ended up 0.10 cent at $3.5945 a pound as the market overcame early profit-taking to ride a bullish wave that analysts said could extend into next

Copper prices have rallied most of the week with the exception of Wednesday’s U.S. holiday for Independence Day on concerns that strike threats at copper mines around the world will depress physical stocks of the metal at exchanges such as Comex, the LME and Shanghai in China.

Among the mine strikes, the one attracting the most attention is at Chile’s Collahuasi, where workers and their managers are struggling to reach a wage deal and abort a strike by Monday.

Union leaders and managers at the mine, which is located in northern Chile and produces 440,000 metric tons of copper per year, talked into the early hours of Friday but were unable to agree on a new contract.

Labor disputes aside, copper prices were also aided by better U.S. economic data.

A better-than-expected U.S. jobs number for June, issued Friday, helped Comex copper rebound from early profit-taking. The nonfarm payrolls report showed 132,000 jobs were created in June, beating a 120,000 consensus in a poll conducted by Reuters.

Oil surged to an 11-month high above $76 a barrel, closing in on its all-time record in 2006, due to disruptions in eighth-biggest exporter Nigeria, cuts by producer group OPEC and rising demand from U.S. refiners.

London Brent crude, currently seen as a better indicator of the global market, settled up 87 cents at $75.62 a barrel, after touching a session high of $76.01, its highest level since August 2006.

The rise put Brent within striking distance of the record $78.65 struck last August.

U.S. crude gained $1.00 to $72.81, the highest settlement since Aug. 22, 2006. It had touched a record $78.40 in July last year.

This column was originally published on RealMoney on Jan. 11 at 2:00 p.m. EST. It’s being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

Even as private-equity buyouts and corporate takeovers are occurring with increasing frequency and at record numbers, the ability to identify and profit from the next big deal remains as elusive as ever.

One of the most popular strategies is to use options, buying out-of-the-money calls on a slew of possible takeover candidates and hoping one gets a big premium bid and delivers jackpot returns. The problem is, just like the lottery itself, buying another fistful of tickets does not measurably improve your odds, but increases the likelihood of loss.

A better bet is to focus your attention, and dollars, on companies already in play, such as Harrah’s (HET) , or those that are courting suitors, such as Foot Locker (FL) .

It might mean lower returns, but it offers a much higher probability of turning a profit. And the last time I checked, consistent hitters Cal Ripken and Tony Gwynn are heading to the Baseball Hall of Fame, while slugger Mark McGwire will be riding the pine of shame into retirement. The obvious lesson is don’t swing for the fences. Be patient and wait for a situation that offers not only a reasonable risk/reward, but also a quantifiable edge.

Collapsing Time Premiums

In options-trading (or any investing, for that matter), eliminating or accurately gauging the behavior of the price variables under a particular circumstance provides an enormous edge to controlling risk and increasing the probability of a profit.

It’s crucial, and advantageous, to understand what happens to the option prices on a company once it agrees to a merger/takeover/buyout: Once a deal is agreed to, the implied volatility or time premium collapses. That is, options that are out of the money will be essentially worthless, and in-the-money options will be priced at their intrinsic value.

Remember, the bulk of an option’s value stems from the right to buy or sell a stock at a set price — the strike price — during a given time period defined by the expiration date. Once terms of a deal are agreed upon, those variables are eliminated and so, too, is the price premium awarded to the options. Sell Calendar Spreads

As I discussed in a Jan. 9 video, one of the best ways to play the possibility of a takeover is to sell a calendar spread. The video used Gap (GPS) , which recently hired Goldman Sachs to explore a sale, as an example.

In this case, I suggested buying the March $22.50 call for 40 cents and simultaneously selling $22.50 calls with a January 2008 expiration for $1.50 per contract. This gives the position a $1.10 net credit for the calendar spread. Because talks are still in very initial stages, the longer term, or LEAP, options still retain a significant amount of time premium. But if Gap does agree, or even home in on the terms of sale before the March 16 expiration day, then expect the implied volatility or time premiums to collapse across the board.

The result will be that the value of the March and the January 2008 calls will trade at nearly equal values, meaning the value of the calendar spread will contract or flatten out. This will be true regardless of the price of the deal; if price is only $20, then both options will be worthless; if there is a 30% premium to $26 per share, then both call options will be worth $6 per contract. In each case, the value of the spread will be close to equal, allowing you to collect that $1.10 premium, which represents the position’s maximum profit.

The risk, especially in a case like Gap, which is still in the early exploration stages, is that the timing, terms and pricing are far from set. In fact, the company might consider spinning off certain units. That means if no deal, parameters or even intentions are clarified by the March expiration date, the position will be exposed to incurring a loss. The 2008 LEAP (long-term equity anticipation) options that you’ve sold short will maintain their time premium and potentially increase in value while the near-term March options you own will expire, possibly worthless.

To avoid winding up with a naked short position, it is imperative to close the position before the March expiration or roll those long calls into a later month. My advice in Gap would be to wait and see if some more details emerge regarding any potential deal. Even after a proposal is put on the table, it is not too late to benefit from this sale of a calendar spread strategy. The key to the trade is establishing the position in the window between when a deal is still just a proposal, and its consummation. Hoping the EGL Deal Flies

EGL (EAGL) offers a recent — and, because I established a position in the Options Alerts Model Portfolio, better, I hope — example of using this strategy. On Jan. 3, the freight company received a buyout bid from a group led by its chairman and CEO James Crane. The bid was worth $36 a share, a 25% premium to the stock’s previous closing price.

The company’s board will review the offer, which investors interpreted as EGL looking for a higher price, so shares jumped to $38 TJan. 4 and have been trading above $37 for the past four days. Given that Crane is also EGL’s largest shareholder, with about an 18% stake, it is likely the deal will go through and at a higher price. After all, he is basically paying a large portion of the purchase price to himself.

The position I established consisted of buying the February $35 calls and selling the August $35 calls for a net credit of $1 for the calendar spread. If a deal is agreed to prior to the Feb. 16 expiration, the time premiums should collapse, the spread will contract and the position will earn the $1 profit of the net credit collected.

If no headway is made by the second week of March, I’ll close the position to avoid ending up naked short the August calls and at the mercy of a rising IV or stock price. But at the moment, with the firm proposal on the table, I like my odds of squeezing out a profit during the time period of very limited risk. Keep Your Eye on the Balls in Play

Right now, there is hardly a name on the board that isn’t being floated as a takeover target, and if you tried to swing at all of those by purchasing calls on every rumor, both your arms and wallet would be exhausted before you connected with a winner.

By focusing on companies that already are in play, that is, ones that are contemplating “strategic alternatives,” officially up for sale or have received unsolicited buyout bids, you have essentially performed a very efficient screen that allows you to pass on the tough-to-read curveballs, and you can now groove on those entering the strike zone.

Hurricane season is here. And the worst may be yet to come.

The season stretches through October and 77% of the storms strike after July, the National Hurricane Center says.

This year, the National Oceanic and Atmospheric Administration predicts 13 to 17 named Atlantic storms. Seven to 10 should become hurricanes. An average season sees 11 named storms.

And active storm seasons can be costly. “Total claims paid by the National Flood Insurance Program during the 2004 and 2005 hurricane seasons totaled nearly $18 billion,” said David Maurstad, director of mitigation and federal insurance administrator for the program.

Katrina accounts for 87% of the total, which was $3 billion more than the NFIP paid after the program began in 1978.

You don’t have to live in hurricane territory to be concerned. Floods occur in all 50 states. Texas and parts of the central and southern U.S. have already been socked by devastating floods in recent weeks.

A key problem is that most homeowner policies don’t cover floods. They usually cover damage from falling rain. Floods are excluded.

A flood occurs when a nearby river or stream overflows. It’s also when ground water from a storm seeps into your basement.

To get coverage, you can buy flood insurance. Basic coverage is available through NFIP, which is administered by the Federal Emergency Management Agency.

This program covers more than 5.4 million people.

“Most NFIP policies are sold by private insurance companies,” said Maurstad. The agent who sold your homeowner’s policy may handle NFIP coverage, too.

NFIP insurance can reimburse you for up to $250,000 of damage to your home. The limit for contents is $100,000. That’s for homeowners and renters.

Business property owners can insure a building for as much as $500,000. They can get another $500,000 of coverage for contents.

Cost Vs. Coverage

The cost of an NFIP policy varies with the coverage. All insurers must charge the same.

You’ll pay the highest premium if your home is in a high-risk flood zone. That’s an area where the odds of a flood are at least 1% yearly.

In these areas, you may need flood insurance to get a mortgage.

You’ll pay as much as $5,358 a year to get maximum NFIP coverage if you live in a high-risk coastal area. Go to floodsmart.gov to see if your home is in this category.

That price assumes you insure the house for $250,000 and contents for $100,000. It also assumes you take a $500 deductible. A higher deductible will lower your premium.

You can get the same $250,000 and $100,000 coverage with a $500 deductible for as little as $317 a year. That will be the case if you qualify as a preferred risk.

You must live in an area with low to moderate flood risk. And you can’t have a history of generating sizable flood claims for that home.

From the time you buy an NFIP policy, it usually takes 30 days for coverage to take effect. So don’t wait until a storm is on its way.

Start the process as soon as you determine you’re interested in this coverage. And don’t feel you must stop with NFIP insurance.

The cost to rebuild your home could top the NFIP’s $250,000 ceiling. And your contents may be worth more than $100,000.

If needed, you can buy coverage beyond the NFIP limits from such companies as American International Group, Chubb and Fireman’s Fund.

Some policies start where NFIP coverage ends. Other policies replace NFIP coverage. The latter provide the first dollar of damage compensation, then extend above the NFIP ceilings.

An insurer may require you to have a basic homeowner’s policy from that insurer as well. Having one policy can help you avoid a debate with multiple insurers over which ones must pay for various damages.

For example, if you have homeowner’s insurance with Fireman’s Fund, you might be able to add $1 million of flood insurance for $555 per year. That rate applies to low and moderate risk areas.

At AIG, excess flood coverage may be available if you have homeowner’s coverage through its Private Client Group. The company’s Lexington Insurance subsidiary offers coverage even if you don’t have its homeowner’s policy.

Mansion Insurance

At either AIG insurer, prices are on a case-by-case basis, dependent on factors such as building age and construction method.

The same case-by-case approach is reported by Chubb, where coverage up to a total of $15 million is available, for home and contents. Flood insurance policies are available in some states and are being rolled out to others.

Chubb offers flood insurance that picks up where NFIP coverage leaves off.

Or you can buy a policy that pays first-to-last dollar, eliminating the need for NFIP insurance.

You’ll pay more for a Chubb policy, in return for broader coverage.