An Express Options Play on the OptionsXpress Buyout
An Express Options Play on the OptionsXpress Buyout
Option traders, the VIX was down yesterday, mostly from upside calls getting smoked and the market moving up the volatility curve. Puts hung in pretty well, although put IV flattened significantly in April. I had to get that out of the way; now onto the interesting news...the Charles Schwab stock buyout of OptionsXpress holdings.
To say that I think Schwab is getting a deal here is the understatement of the century. OptionsXpress is the largest player, in the fastest growing field in the securities business. They are much larger than thinkorswim was when they were bought out several years ago but still got almost 75% of the price OX got. In fact, the company was valued at more than 1 billion dollars less than 3 months ago (prior to the special dividend):
There are a lot of people on the street that seem to agree with me. Law firms are already investigating the deal, and many industry insiders are scratching their heads. While I think an OXPS-SCHW merger is a great fit, the price is off. There are also other places where this might be an even better fit. I could see OXPS working well with one of the major house, Merrill, Morgan Stanley, RBC, or even JP Morgan Chase. Other interested parties could be the fast growing online banks like ING or ALLY. Heck, even interactive brokers might want a piece of this. At 1 billion dollars any of these banks might be willing to snap up OXPS, the price is really attractive.
So what do I think will happen: I think Charles Schwab is going to have to up their offer, or we could see another player enter the fray. Either way, I do not think OXPS will get sold for 17.91. I think the price will have to be closer to 20-22 dollars a share, which would price the company closer to 1.25 billion dollars. While it might not go for 2200 or so, I think 20-21.00 a share is a much more palatable price.
So how could one play this OptionsXpress play...using options? The nice thing is that deal is in stock, so regardless of the situation the IV of the options will not go to 0. It is lowest the IV will move toward Charles Schwabís normal trading IV. However, my guess is that someone it going to come in offering cash or a combo of cash and stock that will increase the overall price. I would trade that we (Mark Longo and I) discussed on the Option Block yesterday (available here). If you want to listen to the analysis make sure you catch the show.
In this trade I would buy the Jun 18 calls for .80-.85 a share, then in order to get the trade premium neutral I would sell enough September 20 calls at the .50-.55 range to pay for all of the June Premium.
This would create a position that will be protected if the deal does go through as planned, but makes a killing if the underlying rallies up to anywhere below 22.00 a share (something I feel pretty safe about). Even if the company goes up to 23.5 the trade still turns a profit (see below). Do not be shocked if in the next few days OXPS sees its share price rise above the deal price. Its got everything a deal trade wants- short vega, long gamma, and low risk:
That would be a sure sign that the street thinks the price will be higher. I'll be back to my normal IV discussions tomorrow, I just felt this was a topic that needed to be discusses.
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