Thursday, February 11, 2010

Allegheny (AYE) - First Energy (FE) Stock Merger

AYE is trading up 2.21 to 23.23. FE is down 2.46 to 39.00. Note that the IV30™'s are identical. The LIVEVOL™ Pro Summaries are below.

The news is presented below:

So a stock deal where AYE = 0.667* FE to close in a year+. Before today, AYE was trading 21.02 and FE 41.46 ---> 0.667*41.46 = 27.65 per share for AYE. That's a 27.65 - 21.02 = 6.63 spread.

Since the news the spread has converged significantly ---> 39*.0667 = 26.01. So 26.01 - 23.23 = 2.78 spread. 2.78 still indicates measureable uncertainty.

The Charts Tab snapshot for each is included (click either image to enlarge).

Notice FE dipping and AYE rising.

A few things to watch out for now.
(1) AYE vol should converge to FE vol as certainty grows - it can be higher if certainty dissipates, but it should generally not be lower (watch out for dividends and other special situations).
(2) AYE should approach (2/3)*FE
(3) Cheap vol bets (purchases) around deal closing if you are a seller of the deal (or if there is edge).
(4) Expensive vol bets (sales) if you are a buyer of the deal (or if there is edge).
(5) Good spreads stock to stock (in options).

Watch the options markets moving forward - line by line with the stock prices as well as the implied rates (divergence can cause hard to borrow rates - see TLB deal HERE for an example).

This is trade analysis, not a recommendation.

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