Friday, May 13, 2011

Tyco (TYC) - Takeover... Take Two...

TYC is trading $50.92, up 2.9% with IV30™ popping 29.8%. The LIVEVOL® Pro Summary is below.


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Tyco International Ltd. (Tyco) is a diversified company, which provides security products and services, fire protection and detection products and services, valves and controls, and other industrial products.

The news today is in regard to the potential takeover bid from France's Schneider Electric. Here’s a snippet from a Reuters news article.
France's Schneider Electric SA (SCHN.PA) is considering joining forces with private equity firms on a bid for U.S. manufacturing conglomerate Tyco International Ltd (TYC.N), the New York Post reported on Friday.
A spokesman for the French company said no deal was in the works.
The newspaper, citing two unnamed sources, said Schneider had not yet determined which private equity firms it would team up with if it were to make an offer. It said any bid could top $30 billion and that it is possible private equity bidders would work on their own, without Schneider.
A bid of $30 billion would represent a 29 percent premium to Tyco's current $23.2 billion market capitalization.

So this is a takeover rumor that actually seems to be news. But it also reads that if there bid is coming from Schneider , it’s not gonna happen for a while. Hmm…

The company has traded over 48,000 contracts in the first 45 minutes on total daily average option volume of just 14,843. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates the action. The Jul 55 calls look to be the most active line having traded over 8,900x on existing OI of 19,791. It’s tough to tell, but I believe the order today are substantially long while the interest is short.

The Skew Tab snap (below) illustrates the vols by strike by month.

It reads like the bid (if it comes) is going to be later than say one week from now (at least, no?). But the upside in May is bid – especially the 55 strike and higher. The May 55 calls are priced at ~7 points higher vol than the Jun 55 and about 11 points higher than the Jul 55 calls. So, regardless of the news, the option market reflects elevated risk in the near-term (vol is up 45% in May, today alone).

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

We can see the stock popped in mid April on the first news of this potential bid – I believe the WSJ broke that story. Schneider denied and refused to comment so TYC stock feel off of the high which was $53.38. Note that the vol rose to  a much higher level the first time the news broke -- today, though the vol has spiked, the reaction isn't as extreme.

The long-term historical vol (HV180) is just 21.29 – so, other than takeover news and moves, this is not a volatile stock. If you’re buying premium, it’s likely related to this story and not a whole lot else.

Possible Trades to Analyze
1. Calendar skew trade May/Jun or May/Jul or both:
The May/Jun or May/Jul or May/Jun/Jul 55 call spread allows for a nice vol scalp. The May/Jul call spread, if it works out for the next 5.5 trading days (and a weekend), can then be turned into a Jun/Jul 55 call spread – i.e. extended. That sells two options with elevated vol against one while never being naked short. Using a diagonal (a higher strike in Jun) allows a similar type of trade but maintains upside in case the stock pops over $55.

2. Sell naked upside:
Very risky, but it is something to analyze.

3. Buy-write:
Owning stock and selling the elevate upside is also worth examining. This could be a multi-month play – sell May, if that works, sell Jun, if that works, sell Jul… etc…

This is trade analysis, not a recommendation.

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  1. Good stuff on TYC, thanks for this.
    Question for you: are you saying the options are necessarily implying a possible bid BEFORE next week's end? Not sure how else to understand the higher vol for front month.
    As well, if you look the OI in May is still quite high.

  2. The option market is implying elevated risk to the upside for May -- that's just another way of saying that the vol to the upisde is elevated relative to other strikes. I hope that helps.