September 2017 Performance
September was a bit challenging as many of the growth stocks in my portfolio generated flat to negative returns. One of my larger positions is Apple (Ticker: AAPL), which was down ~6% and other large positions such as Constellation Brands (Ticker: STZ) was down slightly and Visa (Ticker: V) was only a slight positive. The growth stock portion of my portfolio was a big drag this month.
What saved the month was the merger arb play in Kite Pharma (Ticker: KITE), which is being acquired by Gilead (Ticker: GILD). I pretty much went all in via short Puts and this deal is on track to be completed next week. I really liked this deal as it was structured as a tender offer, which equates to a quick regulatory review and close. I also generated some small gains in Rockwell Collins (Ticker: COL) and Alere (Ticker: ALR). It’s nice to see the special situation / merger arb activity picking up.
I continue to be very cautious in this market environment, but will aggressively pounce on high probability merger arb / special situation plays.
2017 Performance Year to date = +33.72% with the running monthly returns as follows:
January -4.50%
February +10.18%
March +5.1%
April +4.34%
May +5.67%
June +1.34%
July + 2.76%
August + 4.81%
September + 0.48%
posted by Money Turtle @ 7:44 PM
30 comments
30 Comments:
anyone likes the TWX merger deal? the deal is almost like cash (cash + stock collar)at $107.50. Only left DOJ and Brazil regulator to approve? should be done end of this year. Still have about 4% spread left.
Mergerpie,
TWX has some put buyers waiting for us to sell to them. A 12-31-17 closing is such a long way off though. Premiums are much higher dollar wise than KITE and option buying power (ie. $100) is much less than $175 puts. I dislike CNN so I am not personally inclined to dabble here. If you are interested take a look at selling JAN 2019 $100 Puts which could snag bids for $5.05 / $5.10. Place sell limit order just before market open for best chance to fill what you see now.
MT, do not spend too much time analyzing potential target AAAP for me. I discovered AAAP does not offer any options. As arbitrageurs we need full access to all trading tools available. Lack of options is a big negative. We would be better off waiting for one of the big five to make another smaller acquisition via a tender offer. What target might GILD seek out next?
Regards,
Inforesource7
All,
Regarding ALR closing on 10-3-17 and KITE to follow according to OCC memos it appears any far dated options beyond 10-20-17 will be accelerated to 10-20-17. While thta is good we do not have to wait months or years, ha ha ha. 10-20-17 may even be to long for some of you to wait (time is money) and free up option buying power. Here is example of OCC memo language.
ACCELERATION OF EXPIRATIONS
Pursuant to OCC Rule 807, equity stock option contracts whose deliverables are adjusted to call for cashonly delivery will be subject to an acceleration of the expiration dates for outstanding option series. (See OCC Information Memo 23707) Additionally, the exercise by exception (ex by ex) threshold for expiring series will be $.01 in all account types.
All series of Neff Corporation options whose expiration dates are after 10-20-2017 will have their expiration dates advanced to 10-20-2017. Expiration dates occurring before 10-20-2017 (e.g., Flex options) will remain unchanged.
All Neff Corporation options will utilize a $.01 exercise threshold.
Option Symbol: NEFF Existing Expiration: All months New expiration date: 10-20-2017
Existing American-style Neff Corporation options remain exercisable at the option of the holder prior to their expiration. Exercised options will continue to settle in two business days.
Regards,
Inforesource7
Dear Inforesource,
Thanks for the great info! I will take a look into the TWX puts.
MT,
All the talk here about options and what expires worthless and what gets exercised is nonsense.
I have interactive brokers and I got assigned 2 KITE Jan 2020 180 puts this morning.
How odd is this? I have 200 shares which are not tendered now.
Aapltrader
Aapltrader,
It does sounds odd on the assignment. I took a look and noticed 82 open interest (OI) contracts. That is kind of low. I guess this is another item we should pay attention to when selling puts. Low OI raises probability of assignment. The tender offer information should be coming out this morning. Will it be completed or extended. You do have the option of selling your 200 shares on the open market. Shares hit $179.95 after the open yesterday.
Regards,
Inforesource7
Inforesource7
I bought back 175p for .05 yesterday. iBKR charges very low commissions I was able to sell 6 of 180p yesterday hopping the deal would be done today. 2 got assigned and now it's a done deal. Usually day before the tender offer expires there's some jitter in company getting acquired. I put limit of .25 and got filled late afternoon. It was odd they got exercised.
Aapltrader
100 shares got filled at 179.99 and now its halted. Luckily my commission was only 45 cents.
Aapltrader
Aapltrader: That is definitely a strange situation. I've never experienced this type of scenario before. In reality a option holder can exercise anytime they want, even if out of the money. Maybe some kind of hedging strategy going on with a market maker? Who knows... I'm glad you were able to get a good fill.
Broadcom n Brocade announced they refile with CFIUS, directly to 45 days investigation. Strong signal from Broadcom about their commitment and the chances of this deal passing CFIUS.
MT / Mergerpie,
Do either of you have experience with a merger deal where target is offered 100% stock as purchase vehicle? I am most interested in how OTM (out of the money) Puts will process after closing. It may seem like a stupid question but after watching both ATW / ESV shareholder voting this morning to approve deal, closing will be imminent. FYI, OTM Put premiums have not budge. Quick opportunity or something I may be overlooking? Also, one more twist both common stocks are heavily shorted. Appreciate any quick insight you may have.
Regards,
Inforesource7
MT / Mergerpie,
Here are the deal details for ATW by ESV. ATW gets 1.60 common shares of ESV at closing. No cash involved. Watch ESV common stock price and multiple x 1.60 = what ATW common stock price should be. MAR $9 Puts have real nice premium. Is this too good to be true. Closing could be in days.
https://www.sec.gov/Archives/edgar/data/314808/000110465917035899/a17-14344_1ex99d1.htm
Regards,
Inforesource7
maybe there is a risk with ESV stock? usually i prefer cash deal or stock with collar so that any downward risk from parent stock will not affect my profits.
i'm not sure if the parent is cashing out the options or substituting the options..see the defm14a for the company stock options:
Treatment of Atwood Equity-Based Awards (See page 100)
Pursuant to the terms of the merger agreement, each award of Atwood restricted stock units other than any Atwood restricted stock units that are required to be settled in cash ("Atwood RSUs") that is outstanding as of immediately prior to the Effective Time shall vest upon the Effective Time. As soon as practicable after the Effective Time, the Atwood RSUs will be settled through the issuance to the holders thereof of Ensco Class A ordinary shares in an amount equal to the number of shares of Atwood common stock originally subject to such award multiplied by the exchange ratio (rounded down to the nearest whole share). Each award of Atwood restricted stock units that is required to be settled in cash ("Atwood Cash Units") will be treated in accordance with the terms of such award.
Each award of Atwood stock options that remains outstanding and unexercised immediately prior to the Effective Time (an "Existing Option"), will, as of the Effective Time, automatically and without any further action being required, be converted into a stock option relating to the Ensco Class A ordinary shares, on the same terms and conditions (including the same expiration restrictions) as were applicable to such Existing Option immediately prior to the Effective Time (a "Converted Option"), except that (i) the number of Ensco Class A ordinary shares subject to the Converted Option will be determined by multiplying the number of shares of Atwood common stock subject to the corresponding Existing Option immediately prior to the Effective Time by the exchange ratio, and then rounded down to the nearest whole share, and (ii) the exercise price per share of the Converted Option will equal the per share exercise or strike price of the Existing Option immediately prior to the Effective Time divided by the exchange ratio, rounded up to the nearest whole cent.
if the options are exchanged for ESV options, this may explain the Mar 2018 $9 put prices. I am not an expert in this. probably best to wait for MT's views?
I don't play with short Puts in all stock deals. There's just too much risk. Yes, the March 9 Puts have a nice premium, but you will have to deal with the stock volatility. ATW options will convert to ESV options.
Mergerpie / MT,
Thank each of you for your response. Mergerpie you have a knack for digging up valuable information buried within the SEC documents. Nice job. Relating to the two paragraph under Treatment Under Atwood Equity-Based Awards the first paragraph seems to address employee based options. The second paragraph is a little more subtle but I will trust MT's initial opinion with a few counter points. Notice the word "Award". Joe Public (you or I) buying or selling ATW options are not awarded anything. We willingly engage option activity with our own capital. Now if I am wrong, then I would accept some converted option process, although the option conversion formula seems more tailored to an ATW employee not Joe Public. Lastly any Joe Public options should only include ITM Calls and Puts. How could ESV / OCC convert OTM options dealing with implied volatility / time value etc.? It looks like the OI (open interest) for ATW options is approx. 95% OTM and 5% ITM and maybe a few hundred at best. Can you imagine the cost to process a Joe Public options conversion?
MT I understand you prefer all cash deals. So do I but I am willing to explore other select deal combination types that may be mispriced / forgotten about with limited risk. My rational is 1) the deal closing would be executed shortly (days) after the Shareholder votes were successful. 2) That the high short interest in both ESV / ATW could be squeezed after the Shareholder votes were successful. 3) The PUT premium on selling MAR 2018 $9 and $8 offering a 13.9% / 10% simple return is pretty damn good. 4) If I could not buy them back for .05 prior to closing the options most liley would be accelerated to 10-20-17.
When I compare this opportunity versus KITE, for me personally my ROI selling OTM Put options was 1.10% simple, 6.36% annualized. I sold all OTM Puts prior to close for .05 to free up Option Buying Power.
Regards,
Inforesource7
From an OCC memo. options treatment for Atwood
DATE: SEPTEMBER 21, 2017
SUBJECT: ATWOOD OCEANICS, INC. - ANTICIPATED ADJUSTMENT
OPTION SYMBOLS: ATW/1ATW
NEW SYMBOLS: ESV1/1ESV1
DATE: ???
Contract Adjustment
DATE: Effective the opening of the business day after the merger is consummated.
Contract adjustment is anticipated to occur in the third quarter of 2017.
OPTION SYMBOLS: ATW changes to ESV1
1ATW changes to 1ESV1
STRIKE DIVISOR: 1
CONTRACTS
MULTIPLIER: 1
NEW MULTIPLIER: 100 (e.g., a premium of 1.50 yields $150; a strike of 8 yields $800.00)
NEW DELIVERABLE
PER CONTRACT: 160 Ensco plc (ESV) Class A Ordinary Shares
CUSIP: ESV: G3157S106
PRICING
The underlying price for ESV1/1ESV1 will be determined as follows:
BACKGROUND
On October 5, 2017, Shareholders of Atwood Oceanics, Inc. (ATW) will vote concerning the proposed merger
with Ensco plc (ESV). If the merger is approved and consummated, each existing ATW Common Share will
be converted into the right to receive 1.60 ESV Class A Ordinary Shares.
Mergerpie,
Once again you uncover some valuable information (OCC memo) that backs up your opinion. So given this OCC memo the high Put premium before and after both ESV / ATW Shareholder votes to approve merger, owning out of the money Put options that will convert over to ESV Put options is not a good idea for arbitrage. Thanks to you and MT I continue to learn how to be a better fisherman. So now we continue to seek out other arbitrage opportunities.
Regards,
Inforesource7
i agree..as a person i can't do much but as a collective we can achieve more.
MT / Mergepie,
Whats the best way to learn whether a post M&A target has actually filed an FTC/HSR? Are companies required to state in an SEC filing or is it all about go old fashion shoe leather in sniffing out the filing date?
How about that NXPI stock price? Just has a mind of its own. The pressure is mounting for QCOM to consider raising its tender offer from $110 to ??? One can enter a covered call, buy stock at approx. $115 and sell an OTM Jan 2020 $120 call to pay for the gap between $110 and whatever you pay or lower your basis. Morgan Stanley anlayst has a price target of $117.50.
Rumor mill. Will PFE make a play for BMY if the U.S. Corporate Tax rate is lowered to 20%? MT, would this a good cultural fit and strategic fit for these two? BMY has been on the move. It looks like life time high (close) = $73.48 and intra day high = $74.56 both back in 2016. Might be a good regular play with potential takeout as an added kicker into year end. Fair value for BMY would be $80. Thoughts?
Regards,
Inforesource7
i don't think we can know until the companies file with SEC... one example i can think of is Microsoft which announced the linkedin merger in Jun 2016. After that for more than 3 months, we get no news if Microsoft had filed to the FTC until a news report broke out about Salesforce complain to regulators to scrutinize the merger. Microsoft then released a statement saying that FTC had already approved the transaction. If i remember it correctly, I didn't see any sec statement or news from ftc that the transaction had already been approved before the report came out.
i wonder how the NVDA news will hit NXPI. QCOM wanted NXPI to dominate and create the brains of self driving cars just like they did for smartphones... NVDA already had a whole set of plans based on yesterday's news. QCOM maybe late to the party.
Mergerpie,
Good morning. Seems like the FTC / HRS filings for many of these deals is secret and the assumption made by many is if no pushback from FTC / HSR review whcih triggers a cancel and refile surfaces than all seem to accept the old no news is great news theory once the HSR expires with no reported issues. The ultimate silent assumption. If I recall the FTC website has a list of filings but seems to be very difficult to navigate. Maybe the pros who follow have an inside beat.
I do not follow closely the technology involved here other than it is a HOT theme with the chip sector. We have to think QCOM is very aware of what the competitors are doing. This is why they want a piece of the action. There is plenty of room for many in this space. NVDA has to promote and flex it muscles to keep its stock price momentum alive. Thanks for sharing your thoughts.
Regards,
Inforesource7
FTC / HSR: Like Mergerpie stated, you have to wait for the SEC filings. Companies like to be vague in case any issues pop up resulting in a second request. Tender offers are pretty good in providing filing and expiration dates.
i am buying some $TWX stock and 100/97.5 JAN 2018 puts (sold $100 and bought $97.5) averaging for $0.50 credit per option. I still think that the merger will be completed at the end of year so the risk seemed good enough (about 20% for 3 months)? main risk is that the deal will drag and TWX falls below $100.
Mergiepie,
Here is the primary reason why TWX took a hit today. Note TWX and SNI arbitrage plays were both impacted. The selling pressure may not be over. Also note since we are approaching year end, tax loss planning for very large holders may be in play as well. Holders can sell stock to report a loss and then buy back stock within 30 days (wash sale rules). President Trump will not be afraid to juice the sell off with his comments about fake news, FCC license reviews, etc. Trade carefully here.
TV Stocks Tumble After AT&T Cord-Cutting Disclosure
http://www.hollywoodreporter.com/news/tv-stocks-tumble-at-t-cord-cutting-disclosure-1048224
Regards,
Inforesource7
Fellow Traders,
Pay day is coming this Friday / Saturday AM for those of us who played some deals with options that closed recently, (ie. CAB, KITE, ALR, etc.) Its called "Acceleration of Expirations / October 2017 Expirations". What a nice ring has to it. Here is the OCC web link if you wish to check for any of your targets. Look for 10-18-17 memo #42017 with same title mentioned above in quotes. Enjoy.
https://www.theocc.com/
Regards,
Inforesource7
any new deals you guys are looking at? i m still loaded with $BRCD, $TWX and $MON..
I currently have no arb / special situation plays. I am keeping an eye on a few such as NEWS.
Mergerpie,
Only involved in arb plays BRCD and NXPI for now. Looking at arb deals other than cash only such as LVLT, TRCO, BCR and how to profit. Learning about FCC approval process along the way. Your use of Put credit spreads is interesting with TWX.
MT likes to seek out deals with CVR's (ie, LOOK). ha ha ha..... $$$$$...
Regards,
Inforesource7
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