Volatility Trading Digest - Takeover File Update

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Volatility Trading Digest - Takeover File Update

Once again, we turn our focus to takeover activity in those companies with listed options. We review four deals that have already been announced and three that are still in the rumor stage.


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IVOLopps

First, here are four already announced deals that are still working.  

Potash Corp. of Saskatchewan, Inc. (POT)

Last week the Implied Volatility Index Mean rose from 27.59 to 30.46 as put activity picked up taking the put-call ratio to a bearish reading of 1.4 from .55 at the end of the previous week. Although there continues to be reports that Sinochem may pursue a counter bid for POT, perhaps in combination with a Canadian partner, the options are not yet reflecting this possibility. If they do, it will likely take a long time as they are attempting to assemble group to make the bid. Therefore, we donít think the outcome will be known for some time. In the meanwhile, it appears from the rising put-call ratio that longs are beginning to hedge their positions. Here is a suggestion in the event another bid is announced in the next few weeks.



The risk to this position is nothing happens before the October expiration and the long call spread portion is out- of- the money at the October expiration. Watch the news reports and if looks as if the bid will be delayed then unwind the October call spread.

Genzyme Corp. (GENZ)

So far, Sanofi-Aventis (SNY) 30.98 has given no indication that it intends to raise its 69-dollar bid. In the meanwhile, Citi Banks says the company is worth 76. Since this one could also take more time to be resolved here is a put sale to consider. The Historical Volatility is now 17.62.



Airgas Inc. (ARG)

The rising Implied Volatility Index Mean going into the Wednesday September 15 shareholderís meeting suggests the possibility that the vote may go against Air Products & Chemical Inc.ís attempt to change the ARG board. With the current Implied Volatility Index Mean at 35.19, but with a current Historical Volatility of 10.85 and an IV/HV ratio of 3.06, consider this put sale idea.




On Monday, it will have only 5 days to expiration and the theta is high so expect the price to be under one dollar.

Dollar Thrifty Automotive Group Inc. (DTG)

Avis Budget raised its bid for DTG to 40.75 in cash and .6543 shares of Avis shares for each DTG share. Based upon Fridayís Avis closing price of 10.22 the new bid price would be 47.56, still below the current DTG price. The shareholder vote on the Hertz bid is due on Thursday September 16 and if rejected, as seems likely as indicated by the current price, Hertz may then raise its bid above the Avis bid. With a current Historical Volatility of 19.73 and an Implied Volatility Index Mean at 38.32 up from last weekís 35.69 for an IV/HV ratio of 1.94 and with a still bullish put-call ratio of .30, take a look at this put sale suggestion.




With two companies bidding it seems unlikely that the stock will decline 45 by the October expiration, however that is the risk, so be ready to accept the stock by assignment in that event.

Next, here are three deals rumored to be under consideration.

Mosaic Co. (MOS)

There were rumors that Vale SA (VALE) 27.43 may have an interest in expanding its fertilizer operations and since the Implied Volatility Index Mean increased from 48.65 to 53.25 last week and with an IV/HV ratio of 1.18, consider this put sale idea.



This strike price is down below the gap at 52.50 and appears to be a safe put sale, however be prepared to take the stock by assignment in the event it closes below 50 at the October expiration.

XL Group plc (XL)

This formerly Bermuda, but now Dublin based property and casualty reinsurance company was featured as a likely takeover candidate by a FBR Capital Markets analyst who suggested it could go for more than 30 dollars per share.

With a current Historical Volatility of 33.31 and an Implied Volatility Index Mean of 41.54, up from 32.91 in the prior week, it has a favorable IV/HV ratio of 1.25. Consider this combination.


Use a close back below 18.50 as the SU (stop/unwind) or be prepared to take the stock by assignment in the event it is below 20 at the October expiration.

Transocean Ltd. (RIG)

On September 1, when it was closed at 54.33, Bloomberg reported that John Fredrikson of Seadrill Ltd. might make bid for the company. On Friday, the stock was up 3.52 on increasing volume, but so far, the options are not suggesting anything as the Implied Volatility Index Mean at 45.93 is only up from 45.21 the prior week and the IV/HV ratio is just .84. Although there may not yet be options evidence of a bid in the works, consider this put sale idea.


Summary

The major indices continue to trade within the previously defined range between 1025 and 1125 based upon the S&P 500 Index. Now approaching the upper end of the range a reversal could come at any time. In the event it should continue above 1125, it will alter the technical perspective creating new alternatives.

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