Cloudflare Executes Capped Call Options Transaction to Hedge Convertible Notes
The cloud infrastructure company entered into equity derivative agreements structured as European-style call options on its Class A common stock.
Derivatives Strategy Disclosed
Cloudflare, Inc. disclosed in an 8-K filing Thursday the execution of equity derivative transactions structured as capped call options on its Class A common stock. The transactions, documented in Exhibit 10.1, were established under the International Swaps and Derivatives Association (ISDA) framework, specifically incorporating "the 2006 ISDA Definitions" and "the 2002 ISDA Equity Derivatives Definitions" (8-K filing, 2026-08-13).
The options are tied to Cloudflare's convertible notes issuance, with the number of options calculated based on "the number of Convertible Notes in principal amount of $1,000 initially issued" multiplied by "the initial conversion rate" (8-K filing, 2026-08-13). The filing indicates separate components for base and additional tranches, suggesting accommodation for an over-allotment option.
Transaction Structure
The derivatives are structured as European-style call options, meaning they can only be exercised at expiration rather than at any point during their life. Cloudflare serves as the buyer, while the counterparty dealer acts as seller. The options reference Cloudflare's Class A common stock, trading under ticker symbol NET on the New York Stock Exchange.
The transaction includes "Automatic Exercise" provisions, meaning "the Number of Options for the relevant Component will be deemed to be automatically exercised at the Expiration Time on the Expiration Date for such Component if at such time such Component is In-the-Money" (8-K filing, 2026-08-13). Options are considered in-the-money when "the Relevant Price on the Expiration Date for such Component is greater than the Strike Price."
Settlement Mechanics
Cloudflare retains flexibility in settlement methodology. The company can elect either "Net Share Settlement" or "Cash Settlement" for all components, with Net Share Settlement serving as the default. Under net share settlement, the dealer would deliver shares equal to the "Daily Option Value" divided by the "Relevant Price" (8-K filing, 2026-08-13).
The filing specifies that cash settlement elections require Cloudflare to represent that it "is not in possession of any material non-public information" and that the election is made "in good faith and not as part of a plan or scheme to evade compliance with the federal securities laws" (8-K filing, 2026-08-13). The company must make this election two scheduled valid days before the earliest component expiration.
Valuation and Pricing
Relevant pricing will be determined using "the per Share volume-weighted average price as displayed under the heading Bloomberg VWAP on Bloomberg page NET <equity> AQR" during regular trading hours (8-K filing, 2026-08-13). The options feature cap prices, limiting the maximum value through a "Daily Option Value" calculation that uses "the lesser of the Relevant Price on the Expiration Date of such Component and the Cap Price" (8-K filing, 2026-08-13).
Capped call transactions of this nature are commonly employed by companies issuing convertible debt to mitigate potential dilution from note conversion, while the cap limits the cost of the hedge.
Cloudflare shares closed at $330.83 on the filing date, with the company carrying a market capitalization of approximately $118 billion. According to MarginX data, company insiders including Graham-Cumming John conducted recent share sales totaling 303 shares.
This article was generated by MarginX from the 8-K filing on 2026-08-13. It is not investment advice.