Here’s the quick and dirty : there is about $1.37 deal spread between the two stocks, March 1 drop dead date ( either company can walk away from the deal without paying the break up fee), earnings were announced this week for both companies- no deal news, both companies are committed to trying to close the deal and are requesting an extension of up to two months. The government continues to drag their feet on this merger because they have anti-trust issues. If they wait any longer, there will be no issue, one or both will be out of business going forward. As things stand, this is not a profitable business model and the cost savings of this combination is the lifeline to satellite radio.
How to Handicap this situation if you believe the deal will go through?
I feel at this point , I want to buy April and sell March. For my money, the fact that the company needs 2 months past the drop dead date screams to me that March is dead.
There are two spreads that jump out at me in XMSR , April 11 -March 12.5 call spread, or April - March 12.5 call spread.I love selling these March 12.5 for 2 reasons, they are just slightly out of the money and the hitting the $1.40 bid is selling 137% vol, the highest on the board . If I buy April 11 calls for $2.60 (116 vol), I’ve paid $1.20 for this diagonal spread. If I buy the April 12.5 calls for $1.80 (109 vol ), I’ve paid only .40 for the straight calendar spread.
The risk here is that by some miracle, the deal is announced in the March cycle, In the straight calendar spread the buyer will lose the .40 paid for the spread. In the case of the diagonal, the buyer will still make .30 ( paying $1.20 for a 1.50 spread wide spread). My assumption on these numbers would be XMSR will trade $12.5 or higher from the announcement.
I’m playing this one personally for the April deal and I feel like I’m getting the spreads cheap. As always, please be careful and do your own due diligence.
How to Handicap this situation if you believe the deal will go through?
I feel at this point , I want to buy April and sell March. For my money, the fact that the company needs 2 months past the drop dead date screams to me that March is dead.
There are two spreads that jump out at me in XMSR , April 11 -March 12.5 call spread, or April - March 12.5 call spread.I love selling these March 12.5 for 2 reasons, they are just slightly out of the money and the hitting the $1.40 bid is selling 137% vol, the highest on the board . If I buy April 11 calls for $2.60 (116 vol), I’ve paid $1.20 for this diagonal spread. If I buy the April 12.5 calls for $1.80 (109 vol ), I’ve paid only .40 for the straight calendar spread.
The risk here is that by some miracle, the deal is announced in the March cycle, In the straight calendar spread the buyer will lose the .40 paid for the spread. In the case of the diagonal, the buyer will still make .30 ( paying $1.20 for a 1.50 spread wide spread). My assumption on these numbers would be XMSR will trade $12.5 or higher from the announcement.
I’m playing this one personally for the April deal and I feel like I’m getting the spreads cheap. As always, please be careful and do your own due diligence.
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