Thursday, October 17, 2013

The Men's Wearhouse (MW) - Takeover Bid and Option Market Reaction Say One Thing: This Stock is Gonna Move.

MW is trading $46.19, down 0.05% with IV30™ up 25.7%. The LIVEVOL® Pro Summary is below.

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The Men’s Wearhouse, Inc. is a specialty retailer of men’s suits and a provider of tuxedo rental product in the United States and Canada. At January 28, 2012, the Company operated 1,166 retail stores, with 1,049 stores in the United States and 117 stores in Canada.

The news behind MW is simple, a takeover bid was made by Jos. A. Bank Clothiers in the second week of October and that bid has been rejected by MW. Here's a quick re-cap with news snippets:

Jos. A. Bank Clothiers disclosed Wednesday that it made the unsolicited proposal in September to buy Men's Wearhouse for $48 per share in cash, a 42 percent premium at the time. In rejecting the deal, Men's Wearhouse said it wasn't in the best interest of its shareholders or the company.

But the leaders at Men's Wearhouse rejected the offer about two hours after it was publicly disclosed, calling it "opportunistic" and "inadequate."

It later announced it would adopt a shareholder rights plan, also known as a poison pill, designed to thwart anyone who buys a big chunk of its stock without board approval: 10 percent for a person or group, or 15 percent for a passive institutional investor.

Source: AP via Yahoo! Finance Jos. A. Bank offers $2.3B for Men's Wearhouse, written by Anne d'Innocenzio and Tom Murphy, AP Business Writers

The interesting thing about MW is that it just showed up on my custom scan that searches for single day IV30™ gainers.

Custom Scan Details
Stock Price GTE $5
IV30™ GTE 30
IV30™ Percent Change GTE 10
Average Option Volume GTE 1,200
IV30™ Change GTE 7

Something is afoot. Let's turn to the two-year MW Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side, I've highlighted the move off of the takeover bid, when the stock spiked from $35.24 to $45.03 in one day.  The almost instantaneous rejection by MW (just hours after the bid) kept the stock price below the $48 takeover bid (yes, I know there are other reasons it would trade below $48, but this is the big one).  The stock price has sort of meandered higher to just over $46 as of this writing, but it's the volatility that is interesting.

Let's turn to the two-year IV30™ chart in isolation, below.

Totally separate from this takeover news, just check out how hypnotic that earnings volatility is (the blue "E" icons represent earnings dates).  Anyway, onto the story at hand...

We can see that the implied actually rocketed higher on news of the takeover, which is in fact a misrepresentation of the facts, the volatility spiked b/c of the negative reaction MW has to the bid.  Normally when a takeover bid is made, volatility collapses, but in this case the quick rejection from MW and adoption of a sort of takeover defense made the stock price ore risky, not less risky.  I then note that after IV30™ peaked at ~ 44%, it fell again... until today. The implied has popped more than 25% today and that means the option market reflects higher stock risk in the near-term.

This whole thing gets even more interesting when we look at the Options Tab, below.

Noe how the Nov 50 calls are worth ~ $0.80 (mid-market), and the Nov 41 puts are worth ~$.73.  Keep in mind this was a $35 stock pre-takeover bid.  So the questions that remain to be answered are:

(1) Will a higher bid come into play?  The option market reflects a non-trivial chance of this occurring (see the Nov 50 calls).

(2) Will the bid go away?  the option market also reflects a non-trivial chance of this occurring (see the Nov 41 puts).

3) Will either of those things happen in the near-term (next 30 calendar days)? Yet again, the option market reflects a non-trivial chance of this occurring (see the IV30™ rise today).

In English, buckle-up, MW doesn't look like it will be a $46 stock for very long.  Whether it's higher or lower I dunno, but the option market reflects it will be one of those rather than neither.

This is trade analysis, not a recommendation.

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