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Billions is back! The hit series from CBS’s Showtime network is back with season 4, and the intrigue is intoxicating. The show, which debuted in 2016 as the brainchild of veteran TV writers Bryan Koppelman and David Levien, takes us deep into the opulent and cutthroat world of hedge funds, white collar criminals and prosecutors willing to cross the line to catch a whale.
The series follows billionaire hedge fund king Bobby Axelrod (Homeland’s Damian Lewis), the show’s main protagonist, and founder of Axe Capital, on is endless pursuit of an edge to tilt the capital markets in his favor. For the first three seasons, Axe, as he is called, is relentlessly pursued by US Attorney Chuck Rhoades (Paul Giamatti, of Sideways and John Adams fame). Rhoades’ wife, Dr. Wendy Rhoades (Maggie Siff) just happens to be Axe Capital’s in-house psychologist, which complicates matters, to say the least.
Season 3 Synopsis
In Season 3, Axe is forced to step away from his firm as part of an agreement with the government after being charged with insider trading and market manipulation. Axe finds it impossible to stay out of the game despite putting his firm in the hands of trading savant Taylor Mason (Asia Kate Dillon). Meanwhile, Chuck Rhoades, whose wife, Wendy Rhoades (Maggie Siff) is still working as the in-house psychologist to both Axe and his firm, remains intent on prosecuting the billionaire, albeit from a distance, after handing the case over to the Eastern District of New York and his hand-picked US Attorney, Oliver Dake (Christopher Denham).
By the end of season 3, Axe and Rhoades, who have both been crossed by their former lieutenants, are about to join forces to enact revenge. If the past three seasons have taught us anything, there will be treachery, deceit, avarice, suspense, and billions…lots of them.
Billions exposes viewers to the genius and, as some would have it, dirty tricks, of hedge fund managers who weave their portfolio trading strategies around financial regulators, insider trading, corporate actions, and more. It also tracks the relentless pursuit of these hedge fund titans by US attorneys, who sometimes bend the law themselves in order to gain an edge and win their cases.
The show is laden with investing and financial terminology, which makes it irresistible for us. It offers a fascinating look into the way financial markets work at the extremes, and how the system is played at its richest participants. We don’t want you to miss any of the nuances of the plot, so here is a glossary to keep you up to speed:
| G | l | o | s | s | a | r | y | ||||||||||||||||||
| A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |
- Activist investor: An individual or a group of individuals purchasing large quantities of a company’s stock in an attempt to gain control of a sizable number of the company’s voting seats. In so doing, the activist investor can replace management or put pressure on same to significantly change its operational strategies with a view to driving the share price up. For example, Bobby Axelrod buys a 4.9% ownership stake in YumTime Bakeries in order to force management to fire the incompetent CEO and to eliminate corporate inefficiencies which had been costing shareholders for the past 8 years, all while executive compensations had soared 300% over the same time period.
- Alpha: The excess return that a hedge fund earns relative to the performance of a benchmark index or risk-free investment. Alpha is used to measure how well a fund manager performs. In simple terms, if a portfolio has an alpha of +5, it means that it outperformed the S&P index by 5%. A negative alpha signifies underperformance.
- Bedrocks: These are stocks poised to increase in value in the long term. Bedrock stocks are characterized by large market capitalizations and cash flow. Their growth spurt eventually slows down after years of growth, at which point they become income investments. Mundia-Tel was considered a bedrock until it filed for bankruptcy, causing a downward spiral in the telecommunications sector. Axe had received information from a Mundia-Tel insider, Constantine, about the impending disaster before the bankruptcy was made public.
- Bellwether stock: A trendsetting stock that is representative of its sector. A bellwether leads its respective sector in that if its price rises, its sector follows suit, and if it falls in price, the sector declines as well. When telecom giant Mundia-Tel filed for bankruptcy, a domino effect ensued, which saw the stocks of the entire telecommunications sector crashing.
- Bips: Short for basis points (BPS). Bonds are usually quoted in bips. 1 basis point equals 0.0001 or 0.01%. A bond yield that goes down from 1.07% to 1.02% is said to have moved down by 5 bips.
- Blue chip: Companies that are stable and reliable, even in market downturns.
- Block trade: A private, large buy or sell order submitted for 10,000 shares of a security, or a block of shares with a market value of at least $200,000.
- Breakout trade: A technical trading strategy that involves buying or shorting a stock after its price moves outside its defined support or resistance level, usually followed by heavy trading volume and an increased amount of volatility.
- Bucket shop: In the financial industry, a bucket shop is a pejorative term for an investment firm that deals mainly in speculation, gambling, and making bets on stocks and commodities. Axelrod referred to Krakow Capital as a bucket shop.
- Bull and bear: A bull market is characterized by a trend of rising prices in the capital market. Its name is gotten from the way a bull attacks its target by lowering its head and horns and upon contact with its victim, swinging its head up, so as to throw its victim in the air. A bear market is a market in decline. It is likened to a bear, which attacks its prey by making a swift downward swipe of the paw.
- Burn rate: The rate at which a company or company division (e.g. R&D) is spending cash or losing money.
- Buyout: An investment move that occurs when a company purchases a controlling percentage of shares in a target company, in essence buying out the target company.
- Churning: An illegal trading practice that involves a trader executing excessive trades in clients’ accounts in order to generate commissions.
- Cooking the books: A fraudulent accounting act that involves tweaking the numbers on a company’s financial statement to make the company look more profitable than it actually is to investors or to avoid paying higher taxes.
- Currency devaluation: A purposeful lowering of the value of a country’s currency relative to another currency within a fixed exchange rate system. When Axe met with Everett Wright with the intention of poaching him from Richards Capital, Wright mentioned that the Nigerian government was going to devalue their currency (the naira) against the US Dollar due to its weaker than reported oil industry results. Wright also suggested that taking a large short position in the naira i.e. betting against the naira, could devalue the currency much sooner than it would happen if they waited for the Nigerian government to do it.
- Cut bait: A financial term that implies walking away from an investment. Sometimes, investors get too attached to a security. Even when it’s losing money, they keep hoping for a price reversal. Cutting bait, i.e. selling the losing position and bailing out, could mitigate the investor’s losses and clear funds to be used for a new investment.
- Dead cat bounce: A brief recovery in the price of a declining stock or bear market, followed by a resumed downtrend.
- Distressed debt: The debt of companies or municipalities that have filed for bankruptcy or have a high chance of filing for bankruptcy in the near future. Marco, Bruno’s cousin, pitched an investment in distressed bonds to Axe. The distressed entity issuing the bond was a small town called Sandicot, which was selling the bond for pennies on the dollar. There were talks to start developing the town – specifically, building a casino – which was sure to bring in more traffic and investment. The casino license ended up not coming through and the distressed investment became worthless. Though very risky ventures, if distressed entities turn around, the returns could be large.
- Event-driven strategy: A hedge fund strategy that takes advantage of securities that become mispriced for a short period of time after a corporate action such as an earnings announcement, dividend declaration, merger, or bankruptcy notification. Likewise, an event-driven macro play is a strategy whereby a trader exploits short-term movements in securities that are sensitive to macroeconomic movements such as interest rates, commodity prices, or foreign-exchange fluctuations.
- Expense account: A corporate account from which funds are withdrawn to reimburse employees for expenses they incurred while conducting business.
- Family office: A private, boutique, advisory company that manages the wealth and financial affairs of the fund manager, his or her family, and/or a number of the fund’s employees. Family offices don’t manage money for external or outside investors, and are exempt from regulations under the Dodd-Frank financial reforms. A hedge fund could voluntarily convert into a family office to avoid the onerous compliance costs and regulatory scrutiny that haunts hedge fund managers, or to avoid the pressure of meeting a certain benchmark for quarterly returns. A hedge fund could also be forced to wind down to a family office by regulators, as a penalty for unscrupulous trading practices. As part of his plea deal with the US Attorney’s office – and to avoid a prison term – after he was found guilty of insider trading using Arcadia Railroad shares, Steven Birch agreed to convert his firm to a family office.
- FDA approval: In most cases, when a new drug is approved by the US Food and Drug Administration (FDA), the stock price of the pharmaceutical or biotech company that won the approval soars, resulting in enormous gains for shareholders. Drugs newly approved by the FDA are called blockbusters; hedge funds are constantly on the lookout for such potential blockbusters. Donnie Caan, a trader at Axe Capital, fell under the US Attorney’s radar when he made large-volume trades in a biochem company called Rubinex. Shortly after he purchased the stock, the FDA approved the company’s organic pesticide, leading to a surge in Rubinex’s share price and millions of dollars in profits for Axe Capital.
- Hedge funds: A pool of funds raised from accredited and high-net-worth investors, used to create a portfolio managed using a range of alternative strategies. The difference between a hedge fund and a mutual fund lies primarily in the extent of the employable strategies. Axe Capital is a hedge fund run by Bobby Axelrod.
- Hedge fund managers: The name comes from the term hedging, and hedge fund managers like Bobby Axelrod are hired to reduce risk, regardless of how the market performs. Hedge fund managers use various investment techniques to provide the highest possible return for their investors, while at the same time reducing risk. The genius of a hedge fund manager lies in his or her ability to mix strategies to completely eliminate unsystematic or diversifiable risk from the portfolio(s) without taking away from returns. Investment strategies and vehicles used by hedge fund managers include but are not limited to stocks, currencies, fixed income securities, leverage, shorts, swaps, options, futures, and forwards.
- Hedge fund compensation (Comp): This is what hedge funds and their traders are paid. Hedge funds use a fee structure called 2 and 20 to determine their compensation for managing an investor’s funds. The 2 refers to a 2% annual management fee that is paid out of an investor’s assets under management (AUM). The 20 refers to the 20% performance fee that fund managers take. Different hedge funds have different fee structures. At Axe Capital, the fee structure is 3 and 30. This means that an investor who has $4 million dollars with Axe Capital will be charged $120,000 (3% of AUM) at year-end as compensation for the firm managing his or her funds. In addition, a $10 billion hedge fund like Axe Capital, with, say, 20% returns, will have booked $2 billion in profit for its investors at year-end, which means that $600 million (30% of profit) is the manager’s to keep.
- High-frequency trading (HFT): An automated trading technique that uses computers running complex algorithms to analyze the markets for price discrepancies, then executing a large number of orders at high speeds.
- Holding company: A company that provides no services or products, but holds the controlling interest in a number of other companies. The business of a holding company is to hold assets in other companies with active operations.
- Insider information: This is non-public information on a company that, if acted upon, could be financially advantageous to the investor or trader. People who work in a company or have close links to employees of a company may be privy to insider information, which by itself is not illegal, until the information is used to buy or short stock for profit.
- IPO: An initial public offering (IPO) refers to when a company goes public for the first time. Its shares are offered to the public to raise capital for the firm and to give all market participants an opportunity to purchase ownership stakes in the firm.
- Lock-up period: A time frame within which hedge fund investors cannot redeem or sell their shares. Lock-up periods can be three months or longer, depending on how liquid the shares making up the fund or portfolio are.
- Long: A buy position taken on a security, with the expectation that the price will increase in the future. A long position is the opposite of a short position.
- Margin call: This is a broker’s notification to an investor or trader to top up their margin account, thus bringing it up to the minimum required level. A margin account typically allows the account holder to borrow up to 50% of the equities in the account. The broker also requires the account holder to maintain a certain level of value in the account, typically in cash or securities, to act as a buffer against unfavorable price movements. If the value of the holdings drops below this maintenance level, the investor would receive a margin call from his broker. Failure to deposit more cash or securities into the delinquent account may lead to a liquidation of the investor’s shares up to the amount needed to bring the account value to the minimum maintenance requirement. Following an increase in the price of his short position in Cross-Co Trucking, which pushed his account value below the maintenance level, Axelrod’s friend Freddie Aquafino received a margin call from his broker, telling him to top up his account by morning.
- Market correction: A temporary reversal in the direction of the market trend seeking to adjust for under- or overvaluation of stocks. When the market is perceived to be overvalued, a temporary decline in prices is called a market correction. Recognizing that the decline is a correction, savvy hedge fund managers take advantage of the temporarily lower prices by buying low.
- Mergers and acquisitions (M&A): This refers to the marriage of two companies for various reasons, e.g. positive growth, lower operational costs, diversification, greater competitiveness, etc. When two companies announce a merger, the acquiring company normally sees a decline in its stock price, while the target company sees an appreciation of its stock price. This is because most companies typically offer a premium to acquire another firm. This leads to an increase in demand for the target company’s stock until the price increases to match the premium offer. When Axelrod was informed of a pending acquisition of Lumetherm Power by Electric Sun at a price of $41, Lumetherm was trading at $35. If Axe used only this information, he could have bought Lumetherm then and there for $35, and waited until the information became public, at which time demand for the target company would have soared and Axe Capital would have sold when the price hit $41. Two million shares invested in Lumetherm pre-announcement would have translated into a $12 million gain post-announcement.
- Mosaic theory: An analytical investment method that involves analyzing bits of information gotten from multiple sources to make investment recommendations. The sources of information could be public databases as well as non-material, non-public sources.
- Muni bond: ‘Munis’ are bonds issued by a municipality or county in order to finance their capital expenditures.
- Non-compete clause: A restrictive employment contract, whereby a trader agrees not to start or take a job with a company that directly competes with the hedge fund should that trader part ways with it. The non-compete agreement would usually specify the time frame for the employee’s restriction from joining a firm competing with his or her current hedge fund employer – say, 9 months after termination of employment.
- Non-solicitation agreement: An employment contract in which a trader or analyst agrees not to solicit the hedge fund’s clients and investors in the event that he or she resigns or is terminated from the job.
- Overage: In a lease agreement, an overage is the percentage of sales that is paid to the landlord of a store in addition to the monthly rent payments. Axelrod agreed to pay the overage charges of a pizzeria shop as a favor to the owner Bruno, to prevent Bruno from getting squeezed by his new landlord.
- Pare a position: A risk-management tactic that involves reducing the position held in a company’s securities to reduce exposure to risk. The number of shares of a specific company held in a portfolio can be pared, just like the total exposure to equities or fixed income in a portfolio may be pared. For example, a portfolio with 50% equity can have its position pared to 30% equity in order to reduce stock exposure should fundamentals decline. Mafee proposed to pare Axe Capital’s position on BioLance to reduce its risk exposure to a pending special-announcement call that could turn out to be negative for BioLance’s stock price. If he pared his exposure to the company’s stock, and the announcement call turned out to be negative, Axe Capital could have still earned 10%. Since the paring wasn’t done, and the announcement call was a notification that BioLance’s Type II diabetes inhibitor was denied approval by the US Food and Drugs Administration (FDA), Axe Capital lost close to $1 billion on its investment position.
- Ponzi scheme: An investment fraud that involves refunding money and distributing earnings to existing investors out of funds raised from new investors. The investors are unaware of the Ponzi scheme, and have been made to believe that the company is a real money management firm generating high returns on their investments.
- Prime broker: An investment bank offering concierge services to hedge funds in the form of securities lending for short sales, margin provision, trade order execution, and custodianship of securities. Spartan-Ives is Axe Capital’s prime broker. When Axe Capital was being squeezed out of its short position on Cross-Co Trucking, Spartan-Ives threatened a margin call to protect itself from any further increase in the stock price. Remember that to carry out a short, the hedge fund has to borrow the shares from its broker, and then sell them in the open market.
- Prisoner’s dilemma: A game theory hypothesis in which two individuals make decisions out of their own self-interest, and find themselves in a worse predicament than if they had cooperated with each other. When Peter Decker, CEO of Quaker Ridge Financial, was brought into the US Attorney’s office for alleged insider trading on Pepsum Pharmaceutical, Chuck Rhoades implied that if Decker cooperated with him, the penalty doled out would be lighter than if Decker sought to protect himself and was eventually found guilty.
- Public filings: Financial statements submitted to the US Securities and Exchange Commission (SEC) by public companies and insiders, to be made available to the public.
- Pyramid scheme: A fraudulent investment scheme, whereby money brought into the firm by new investors is distributed to existing investors as profit generated. Unlike a Ponzi scheme, the investors in a pyramid scheme are in on the scheme, and are motivated to refer new clients to the company.
- Quant fund: An investment fund in which securities are selected using numerical and statistical methods rather than human analysis. Axelrod mentions that a decline in returns on his hedge fund was due to a rise in the number of quant funds.
- Quants: In season 3, Taylor Mason interviews several quant traders to see if any of them have the ability to outthink the firm and deliver higher returns. Quantitative traders use a blend of mathematics, computer algorithims, and complex models to create and implement trading strategies faster and more effectively than humans.
- Quote stuffing: A market manipulation technique that involves traders placing a large number of buy and sell orders and then canceling the orders almost immediately in an attempt to throw off other market participants, who rely on market depth data. Quote stuffing creates a false sense of a security’s demand, supply, and liquidity, and is mostly carried out by high frequency traders (HFT).
- Raider: An activist investor who initiates a hostile takeover of a company with the intent of generating huge profits after the takeover. A raider is typically uninterested in the long-term prospects of the target firm post-acquisition, but is rather interested in increasing the value of the target company’s price in the short term, selling his or her ownership stake at the ramped-up price, and then selling off the company’s assets in chunks or en masse. Hutch Bailey III of YumTime Bakeries accuses Axelrod of being a corporate raider when Axelrod buys a large stake in the company to push Bailey out, owing to the latter’s incompetence as CEO.
- Rally: An increase in the price of a security or securities in a bull or bear market within a specific period of time, due to a significant rise in demand for the security.
- Revenue sharing: The distribution of operating profits and losses among partners and select stakeholders in a business firm or project. After three of Axe Capital’s employees left the firm to start their own fund, Lonosphere, they ran into serious investment losses from a poor trade made on the basis of misinformation. One of the conditions Axelrod stipulated in exchange for bailing Lonosphere out required that the two parties enter into a revenue-sharing agreement.
- Risk-averse investor: An investor who doesn’t like to take risks on his or her investments. A risk-averse investor would rather earn lower returns with known risks than earn higher returns with unknown ones.
- Robber baron: A wealthy individual who garnered his or her wealth from unscrupulous or dishonest means. Sandy Belsinger, the CEO of Giving Oath, informed Bobby Axelrod that his bid for an NFL team was rejected because he was considered a robber baron.
- SEC: The Securities Exchange Commission (SEC) exists to regulate securities market transactions and the activities of financial professionals in order to ensure fair, transparent, and efficient trade practices.
- Securities and wire fraud: A Ponzi scheme, whereby funds are solicited and received from unwitting investors, and wired to the accounts of earlier investors, as if in exchange for providing legal investment services. In a securities and wire fraud, $1 million is gotten from investor Z who is promised an annual return of 12%. From Z’s $1 million, Investor X, who also invested $1 million dollars with a guaranteed return of 12% a year earlier, will have $120,000 wired to his account as evidence that his investment was profitable. Meanwhile, investor Y wants all her money that was ‘invested’ six months prior refunded back to her, which in total was $500,000. This money is taken from investor Z’s investment and wired to Y’s account.
- Sharpe ratio: A ratio of return to risk that measures how an investment or portfolio performs. The Sharpe ratio is important to investors who want to know the level of return they are getting for taking on a certain level of risk. A high Sharpe ratio indicates that the investment is generating high returns compared to the level of risk exposure. When Axelrod went to an institutional investor with the intention of raising capital for his fund, the investor wanted to know the reason for Axe Capital’s low Sharpe ratio.
- Shell corporation: A legally registered company with little to no assets, providing no services or products. A shell company may be set up for legal or illegal purposes.
- Short: A position taken in a security, where the shares are borrowed, sold, and then bought back. A short position is the opposite of a long position – the long position being the mode through which people invest in securities most of the time. In a long position, one buys a stock in hopes that the price increases, so s/he can sell for a profit. In a short position, one sells a stock in hopes that the price decreases, so s/he can buy it back at the lower price for a profit. When Axelrod got wind of a faux merger between Lumetherm and Electric Sun, he advised his traders to short Lumetherm. It was trading at $35; Axelrod believed it would drop to $32. The price actually dropped to $31.19, the trader covered the short, and Axe Capital made $18 million on the short strategy.
- Short squeeze: This is an event that occurs when a stock price increases, forcing short sellers to exit and close out their short positions, so as to cut their losses. The scramble to buy back shares forces the prices to go even higher, due to the perceived higher demand. In his defense for throwing the hedge fund manager of Piedmont Capital, Steven Birch, under the bus, Bobby Axelrod claimed that Birch short-squeezed him out of HMOs (health maintenance organizations) the previous year. This basically means that Axelrod took a short position on the HMO sector with the expectation that the sector would crash, while Birch took a long position and bought HMOs in large enough quantities to increase the HMOs’ stock prices, thereby squeezing Axelrod out of his short position. Chuck Rhoades Sr., the US Attorney’s father, similarly tried to squeeze Axe out of his short position on Cross-Co Trucking by pumping the stock’s price.
- Socially responsible investing: An ethical investment strategy that focuses exclusively on the securities of companies promoting certain environmental and societal values, e.g. investing in green companies.
- Sophisticated investor: An investor with the requisite knowledge and investing experience allowing him or her to understand the risks of an investment vehicle.
- Sovereign wealth fund: A country’s reserve fund, used to invest in projects that will benefit the country.
- Spinoff: A type of divestiture in which a company splits and sells new shares of a part of its business in order to create a new and independent company.
- Spike: In technical trading, a spike indicates abnormal buy or sell activity in a stock, which creates a large increase or decrease in the direction of the price, all within a short time period. In the pilot episode, Ari Spyros shares with US Attorney Chuck Rhoades his findings about a days-long buying spike in Pepsum Pharmaceuticals stock, triggered by the trading activity of three small funds possessing insider information guiding them as to when to buy and sell the stock.
- Subprime mortgage: A type of mortgage issued to high-risk borrowers with poor credit. The interest rate on a subprime mortgage is higher than the prime rate.
- Takeover: A takeover occurs when an acquiring company buys a majority stake in the target company in order to assume full control of the latter. A takeover can be of the welcome or hostile variety.
- Trade by appointment: This refers to stocks or options that are not frequently traded, and are hence illiquid. A seller looking to dump his shares of a company that trades only occasionally and by appointment will find it very difficult to find a buyer.
- Trade on margin: In short, this means trading with borrowed money. Hedge funds borrow money from their prime brokers to be able to buy more securities than they normally would be able to.
- Treasury bids: The US Treasury uses an auction process to sell Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation-Protected Securities (TIPS). An auction is normally announced, detailing how much money the government intends to raise and the day and time by which all bids should be submitted. On the auction day, the non-competitive bids are filled first, followed by the highest bids from the competitive tenders. Lawrence Boyd of Spartan-Ives was investigated for Treasury bid rigging by the US Attorney’s office. This could mean that his hedge fund submitted bids using multiple accounts in order to gain a larger controlling portion than the maximum limit of 35% allowed. The reason for setting a bidding limit of 35% of the bonds or notes issued is so that no firm with a winning bid can have a monopolistic position on the Treasury securities. It could also mean that Boyd colluded with other ‘hedgies’ to keep the bids at a certain price, so that the securities could be resold at higher prices to investors.
- Two and twenty: Hedge funds typically charge their clients 2 percent of assets under management, and keep twenty percent of the returns. In Season 3, Axe has been forced to relinquish trading, but convinces another hedge fund owner to trade on his behalf, but on Axe’s terms, which are one and ten.
- Window dressing: The deceptive act of selling stagnant or losing stocks and purchasing strong stocks prior to issuing quarterly financial statements, in order to give the appearance of solid investment management throughout the reported quarter.
- Year-to-date (YTD): The period from the first day of the calendar year or fiscal year up to the present day. When talking to Wendy Rhoades, Axe Capital’s psychologist, trader Mick Danzig mentioned that he was down 4% YTD, which means that from January 1st of that year to the present day of the same year, his returns as a portfolio manager constituted –4%.
- Zero-cost collar: A short-term options trading strategy that hedges against the risk of an unfavorable movement in the price of a security. The strategy combines the purchase of a put option and the sale of a call option in order to protect the maximum downside of the underlying security or shares. Mafee is having trouble selling 5 million shares of Bluudhorn Steel on the market at $40, because the shares are illiquid. His analyst intern, Taylor Mason, proposes going into a zero-cost collar strategy to buy $40 put options and sell $45 call options. Since one option has 100 shares underlying it, Mafee will need 50,000 options on each side. Both options will have the same cost or premium – say, $5 per option. Selling the call gives him $5/option, which he would then use to purchase the puts, also at $5/option. Thus, there’ll be no out-of-pocket costs for the trader, since one option funds the other. If the price of Bluudhorn Steel drops below $40 at the expiration date, Mafee still has the right to sell the shares at the put strike price of $40, as per the put options contract, thereby protecting him from the price drop. The call options would expire worthless at a below-$40 price, since the call options buyer on the other end of the contract would be better off buying the shares at the reduced price, on the market, rather than buying at the $45 strike price.
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