Thursday, June 24, 2010

Ares Capital (ARCC) - Huge Downside Put Buyer on "Mezzanine Debt" Holder

ARCC is trading $13.37, with IV30™ up 5.9%. The LIVEVOL™ Pro Summary is below.

Ares Capital Corporation is a specialty finance company. It invests in United States middle-market companies. It invests primarily in first and second lien senior loans and mezzanine debt.

That sounds like a nice safe business right?... Well, the first lien part at least...

The company has traded over 10,400 options on total daily average option volume of just 2,238. 10,200 of the options are July 12.5 and Aug 12.5 put purchases. The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).

The Options Tab (click to enlarge) illustrates that the puts are mostly opening (compare OI to trade size). You can also see that the front month (where the trades are) vol is the lowest vol of the other months.

The average stock volume is ~1.7 million shares. Today 953k have traded thus far. I don't have any reason to believe these were done with stock (but that doesn't mean they weren't). If you look to the biggest trades snap (above), you can see these are auto exec or regular. In other words, non negotiated. For the July puts (the 8,600+), someone paid $0.30 vs a $0.15 - $0.30 market. That's paying up quite a bit on some baby puts for size.

The largest individual holder has just 140,000 shares according to Yahoo! Finance. There is an institution with 8 + million (Vanguard). If these trades are a hedge, it's an institution.

Finally, the Charts Tab (12 months) is below (click to enlarge).

We can see the stock has been quite a bit lower. The 52 wk range is [$6.95, $16.55]. Since this is supposed to be an "income generating" closed end fund, it could make sense for Vanguard to hedge its position one to one. No other holder (individual or institution) has enough shares to make this put purchase be a hedge 1:1 (i.e. too many puts traded).

This is trade analysis, not a recommendation.

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