Facet (FACT) - Trading Below Hostile Takeover Price

FACT is trading 15.46 and IV30™ is up 5%. The LIVEVOL™ Pro Summary is below.



The company is in the midst of a hostile takeover bid from Biogen (BIIB). The corporate action is included below:



More news details here:
Biogen Idec (NASDAQ:BIIB) announced that it is prepared to run a proxy contest to replace at least a majority of the directors of the Board of Facet Biotech Corporation (NASDAQ:FACT) if: Facet shareholders tender a majority of the company's shares outstanding before Biogen Idec's tender offer expires and the Facet Board refuses to listen to the explicit wishes of its stockholders.

Biogen Idec reiterated that its all-cash $17.50 per share tender offer for Facet represents its best-and-final offer. Biogen Idec believes its offer fairly values Facet.

It's unusual to see vol increase in a takeover - that and the depressed stock price indicate a fair amount of uncertainty here. The Charts Tab snapshot is included below (click the image to enlarge it).



The stock was trading just below $9 before the bid - then popped above 18.25 intra-day in late December. Recently, however, it has begun to trail downward - it's below 15.50 as of this article.

The Options Tab snapshot is included below (click to enlarge).


You can see that earnings are scheduled for mid March - expo is just 3 days after. If the deal falls apart somehow, it's a reasonable guess that the stock could plummet back to the $10 area. The Mar 12.5 puts are no bid @ 0.20 which at first glance feels cheap. Then again, if there is any feedback from the management at FACT, it will probably occur during the earnings conference call - that hypothetically makes the March options not 1 + months, but more like 3 days. How much are those worth?

It seems like buying many cheap puts (not necessarily March) against fewer long shares could be a good trade - then again who knows how long his drags out - it could turn into the ultimate premium killer - decay, decay, decay... Add the fact that the options are illiquid (total daily average volume is 193 - zero have traded today so far) and the trade is less obvious.


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Airgas (ARG) - Takeover and Order Flow

ARG is trading 62.35 pre-market - up $20 from the close yesterday on an unsolicited cash bid from APD. The LIVEVOL™ Pro Summary is below.





You can see ARG was the number 1 scan for call volume yesterday - "Unusual call volume relative to average." The company traded 1,712% of the average just in calls. The snapshot is below (click to enlarge).



The company traded over 4,800 options today on total daily average option volume of 341. Further, 4,570 were calls for an 18:1 call:put ratio. The Company Tab snapshot is below (click the image to enlarge).



The Options Tab and Trades snapshots are included below - someone bought the Apr 50 and 55 calls on opening open interest. Click either image to enlarge.





The largest Open Interest on all lines on all months for both calls and puts will be (is) the Apr 50 and Apr 55 calls. Coincidence?

Apr 50 Calls: Paid 0.35 and will be woth over $12 today.
Apr 55 Calls: Paid 0.10 and will be worth over $7 today.

Apr 50 calls profit: 1300 * 100 *(12-0.35) = ~$1,500,000 +
Apr 55 calls profit: 2000 * 100 *(7-0.15) = ~$1,400,000

So ~ $3,000,000 made in a day. How lucky?...

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Deutsche Bank (DB) - Earnings Vol & Skew Update

DB is trading 60.19, down 6% after earnings this morning with a crashing market. The LIVEVOL™ Pro Summary is below. The link to the first blog is HERE



The company has traded over 4,500 options today on total daily average option volume of 1,464. The Company Tab snapshot is below (click the image to enlarge).



You can see the IV30™ is up 3 points today or 6.7%. So what's so interesting about that? DB had earnings this morning - the vol crush never happened. It seems that the broader market problems are having a greater impact on this large financial than its company specific news. The skew is included below as is the skew from yesterday.





Note that - well - they look the same. Earnings vol isn't always a sale for several reasons - usually b/c the earnings move could be greater than the IV indicated. Here's another reason - the vol went up and the stock moved 6%. A good example to remember - it wasn't intended, but it worked out pretty well as an illustration.

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Medivation (MDVN) - Phase III Trial Vol and Skew

MDVN is trading 35.74. The LIVEVOL™ Pro Summary is below.



The business and financial summaries are below (coming very soon to Livevol Pro) - click the image to enlarge it.



This is a bio-tech with news coming very soon. Here is a snippet from Briefing and TheStreet.com:

Briefing.com
They [Roth Capital] note MDVN is expected to release Phase 3 data for its clinical study of Dimebon (Alzheimer's), likely early in Q2. Although difficult to predict, believe that odds of success of this study are ~65%, they also cite a high short interest (25% of float) making for a potential major squeeze.

TheStreet.com
SAN FRANCISCO (TheStreet) -- Medivation(MDVN) and Pfizer(PFE) could release top-line results from a phase III study of their Alzheimer's disease drug Dimebon in early March, according to a story published Tuesday by Bloomberg.

The charts Tab snapshot below (click to enlarge) illustrates the IV30™ (red line) spiking into the phase III results while the underlying is sitting still in anticipation (blue line is HV20™).



The Skew chart is included below as well - since the news is due out in March (after Feb expo.) you can see the front month vol (red) is substantially below the other months. A snip from the Options Tab is embedded in the chart - you can see Feb vol is 71 vs. Mar vol of 153.



Finally the Options Tab below (click to enlarge) demonstrates the options markets for the first 3 months (full montage available in the app).



Anytime bio-techs enter into these high vol events, options prices can get pretty whacky. A few things that caught my eye from the montage:

(1) The Feb vol is still in the 70's even though the news is due for after Feb expo. The ATM straddle (Feb 35) is still priced: 3.55 x 4.15. In other words, fair value is ~ $4 on a $35 stock, or 11.5% for two weeks.

(2)The Jun 35 ATM straddle is worth about $25 (ish). A purchase would require the stock to move above $60 or below $10 - now that's some juice. 25/35 = 71% implied stock move by end of June.

(3) The March ATM straddle is ~$14.50 fair value. A purchase of March and sale of Feb costs ~$10.50. If Feb rolls off as close to worthless (i.e. stock trades $35 at expo) you could own a $10.50 straddle that has fair value of $25 in June with news in March. I'm pretty sure more news is coming after March just looking at these prices. I leave it to the reader for more complete research.

(4) The March 45 calls have fair value $4.60. The March 25 puts have fair value $2.55. Both are ~10 out of the money.

(5) The March 65 calls are worth $2 - whoa! Enough said. You could buy 1 March 50 call for ~3.60 and sell 2 Mar 65 calls @ ~2 and receive 0.40. You make money unless the stock goes above 80! That doesn't mean it's a good trade, it means the option markets are pricing that as a legitmate possibility. That's ~1500% annual return for $35 stock going to $80 in a month.

The general rule for bio-techs is that the wings (OTM options) are too expensive and the guts (ATM options) are too cheap. Having said that, "general" rules might not do you a lot of good if you're short the wings in a stock that moves 200% in one day.

This is trade analysis, not trade recommendations.

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Deutsche Bank (DB) - Earnings Vol & Skew

DB is trading 64.50. Earnings are 2/4/2010 BMO (tomorrow). The LIVEVOL™ Pro Summary is below.



Several skew charts are presented below - click any image to enlarge it.
(1) Current Skew: Note the vol difference between the front (red) and other months, specifically the second month (yellow) (i.e 49 - 43 = 6).



(2) Skew as of 1/21/2010 - i.e. What you might expect the skew to return to after earnings are released and the ensuing vol crush. Note the convergence of red to the other months.



(3) Skew as of 10/28/2009 - The day before the last earnings release. The vol difference between the front (red) and the second month (yellow) is ~2 vol points.



Finally, the Charts Tab snapshot is included below (click the image to enlarge it).



Note in this chart:
(1) In the bottom part of this chart (the volatility), the HV20™ (blue line) is actually above the IV30™ (red line) currently (the far right of the chart).
(2) Last earnings cycle (see the "E" icon in the top chart) the stock HV20™ moved significantly more than the IV30™.
(3) Last earnings cycle the stock dipped into earnings, and increased out.
(4) This earnings cycle the stock has dipped into earnings and seems to be turning.

So the first skew chart (today) when compared with the last earnings cycle skew chart (third chart) shows that the front month relative to the other months seems expensive. But, the stock and vol chart shows a similar pattern to last earnings where vol seemed like a purchase (after the fact).

This is an interesting phenomenon which is not terribly common - HV > IV into earnings where last earnings HV moved more than IV. Combine that with a higher front than other months relative to last earnings.

This is trade analysis, not a reccommendation.

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TLB - BPW Warrants

As if the TLB - BPW conversion isn't complicated enough, here's a little more to chew on. Keep in mind, the warrant details mat change - read the filings to see the details. I have NOT verified everything here - this is just how we see it on the floor and I can't find a single trader here that is certain about some of the minute details; I can find traders that are trading these warrants with the stock(s) (various sides).

First blog: HERE
Second blog: HERE



Yesterday Near Highs:


Yesterday Close:


Two warrants exist: BPW.WS (1.18 x 1.20), BPW.U (11.00 x 11.80)

BPW.WS is a 7.5 strike warrant that you can buy for 1.20. It is like European exercise - it can only be exercised if the deal goes through. You would buy one BPW share for 7.5 which is the net of paying 8.70. As long as TLB stays above $8.49.

Why 8.49? The target price for TLB conversion is 11.25. The number of shares of TLB that each BPW share turns into is in a range 0.90 - 1.325. So, assuming the worst case scenario (lowest TLB stock) you get 1.325 shares of TLB for each BPW ---> 11.25/1.325 = 8.49.

So at fist glance this is an easy arb. Buy the warrant for 1.20 --> deal goes through--> exercise your BPW for a total of 8.70 and sell it out @ 11.25 as long as TLB doesn't collapse from ~13 to below 8.49.

But that would imply that there is ~30% chance that the deal doesn't go through - otherwise the arb wouldn't be there anymore. But all signs point to this being more like a 90% event (or more). So what's happening?

Recall the difference between a warrant and an option. Specifcally, warrants issued by the company itself are dilutive. When the warrant issued by the company is exercised, the company issues new shares of stock, so the number of outstanding shares increases.

So the rub here is that there will be an increase in the number of shares of TLB and push it down far enough that buying for 8.70 + risk premium is not necessarily a good purchase. i.e. the market is saying that TLB will be 8.70 + risk premium.

I believe if TLB closes above 12.50 the conversion ratio is unknown; there seems to be conflicting info on this.

For completeness: BPW.U is the warrant + one share of BPW stock.

News (http://www.tradingmarkets.com/.site/news/Stock%20News/2717200/)
-- Thanks to reader Peter Lawler for finding this oddity --
The transaction also contemplates that, following receipt of BPW stockholder approval, Talbots will undertake an exchange offer for existing BPW warrants held by public warrantholders. The exchange offer will provide that 50 percent of the BPW warrants held by public warrantholders will be exchanged for the equivalent of $1.125 per BPW warrant in Talbots common shares through a floating exchange ratio of between .09000 - .13235 Talbots shares per BPW warrant, based on the trading prices of Talbots common stock prior to the BPW stockholders meeting, that the balance of BPW warrants held by public warrantholders would be exchanged for new Talbots warrants with new terms, including a term of 5 years and a strike price set at a premium of 30 percent to the closing valuation of Talbots' common stock as determined under the merger agreement. The Sponsors and certain directors of BPW have agreed to exchange all of their warrants for Talbots common stock at the same floating exchange ratio of between .09000 - .13235 Talbots shares per BPW warrant.

I don't recall ever seeing something so unnecessarily complex before...

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Select Comfort (SCSS) - Call Accumulator into Earnings

SCSS is trading 7.35 with vol up 15% today. Earnings are on 2/10. The LIVEVOL™ Pro Summary is below. I found this stock from the high option volume scan.



The company has traded over 4,300 options today in the first three hours on total daily average option volume of 202. Further, 4,225 have been calls for a 32:1 call:put ratio. The Company Tab snapshot is below (click the image to enlarge).



Essentially the entire volume has been purchases of the Feb 7.5 and Mar 7.5 calls. The day's biggest trades and Option Tab snapshots are inlcuded below (click either image to enlarge).





Note the OI in both lines is in the 3000+ range - these trades could be closing as the volume is less than the OI. Also, the OI in the Feb 7.5 line looks suspiciously similar to the actual volume. I have included the Level II pop outs for each line below with the OI chart.





You can see that the OI for both lines has a similar climb. Going to the Time & Sales Tab I looked these opening trades up - they were also purchases. It seems that the call purchases today are a double down bet on the original call purchases (not necessarily by the same entity).

So vol is up, OI is doubling, option volume is 2000% of the daily average and earnings are coming in a week.

The 2-year stock chart is included below for convenience (click to enlarge).


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TLB - BPW Arb Update

The first blog about this Arb is HERE. This was picked up by Bloomberg.



TLB is trading 13.26, BPW 10.39. The LIVEVOL™ Pro Summary is below.





In order to back out an implied borrow rate, I have included the Options Tab snapshot below (click to enlarge).



March 15 Reversal (fair value)
Buy Calls: 0.325
Sell Puts: 2.30
Synthetic Long Stock: 15 + 0.755 - 3.15 = 12.325
Reversal Receives: 13.26 - 12.325 = 0.935
That is an implied borrow rate to March expo of: 60%

So buying BPW 10.39 and selling TLB @ 13.26 earns $2.97 - cost of carry (0.935). Total "arb" is $2.035 per share. Of course this has a lot of risk with the short stock and the assumption that you can hold that short TLB to march expo is quite a leap given the buy in risk. Also, the conversion ratio is now 0.9 (the minimum). So in fact you are receiving 0.9*13.26 = 11.93 (The target was $11.25). So the actual arb is 11.93 - 10.39 - 0.935 = 0.61.

You could also purchase 1 share of BPW for 10.39 and hold it until the conversion of shares. If TLB stays here, you sell that share of BPW out @ 11.93 for $1.54 arb without the risk of being short stock or paying a negative rate. But... TLB could be much lower by then... Since the cost of carry is ~$0.93, if you think TLB stays higher than this price - 0.93, then you would skip the sale of TLB now and wait unitl the conversion... That's replacing borrow and buy in risk with naked delta risk.

Also, there is a risk that this doesn't go through - then you would be left with a bunch of BPW stock and no hedge.

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Standard Pacific (SPF) - Calls into Earnings

A very quick blog here on unusual trading - SPF is trading 3.98 with earnings AMC 2/3/2010 (i.e. tomorrow). The LIVEVOL™ Pro Summary is below.



The company has traded over 7,000 options today in the first 15 minutes on total daily average option volume of 622. Further, every contract has been call purchases. The Company Tab snapshot is below (click the image to enlarge).



Essentially the entire volume is a 5000 lot of Mar 5 calls and 1500 Jun 5 calls. Note earnings are in one day. The Option Tab snapshots is inlcuded below (click the image to enlarge).



Note the small OI relative to the trade size.


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Talbots (TLB) and (BPW) Takeover - Arb or Not?

TLB is trading 11.40, BPW is 10.27 . The LIVEVOL™ Pro Summaries are below.





TLB has traded nerly 14,000 option contracts in the first 3 hours on total daily average volume of 4,654. The Company Tab snapshot is included below (click to enlarge).



This is the news from Reuters Key Developments (soon to be available on Livevol Pro).

PW Acquisition Corp. And The Talbots, Inc. Sign Definitive Merger Agreement
BPW Acquisition Corp. announced that it has entered into a definitive merger agreement pursuant to which it will be acquired by The Talbots, Inc. Upon closing the combined company will retain Talbots' ticker symbol [snip]. Under the terms of the merger agreement, the proceeds of BPW`s cash-in-trust of approximately $350 million, in conjunction with [snip] a new $200 million revolving credit facility [snip] will be used to retire all of Talbots` existing debt. In addition, Talbots will acquire all of the outstanding shares of Talbots common stock held by AEON (U.S.A.), Inc., which represents a more than 54% stake currently. BPW common shares will be exchanged for the equivalent of $11.25 per BPW share in Talbots` common shares within a floating exchange ratio range of between 0.9000 - 1.3235 Talbots shares per BPW share, [snip] BPW`s shareholders will own between approximately 60-69% of Talbots` common shares.

With an 11.25 resulting share value for BPW shareholders a trading opportunity seems to exist. Buy 10.27 stock and sell it later at 11.25 to make 0.98. The risk is that TLB price goes down a lot, so even 1.3235 * price < 10.27. But that would require TLB to go down to 7.76. There is some non-zero probability that occurs. How about this...

TLB is trading at 11.40. So you could buy the 10.27 stock and sell it instantaneously at 11.40 (no stock price risk). This "arb" is causing substantial short interest in TLB making it "hard-to-borrow." The TLB Options Tab is included below (click to enlarge).



The reversal/conversion for TLB indicates that there is a substantial negative implied rate to borrow TLB.

R/C Calcs
Feb 12.5
Buy Calls 0.15
Sell Puts 1.50

Synthetic Long Stock: 12.5 + 0.15 - 1.50 = 11.15
Sell real stock: 11.40
Receive: $11.40 - $11.15 = $0.25

$0.25 implies 46% (annual) interest rate in Feb. on an 11.40 stock price. Or, in other words, it costs 46% fair value to borrow TLB. Then, looking at the trade-off of buying BPW and selling TLB (and paying 46% to short TLB) looks "less good."

For completeness, the implied rate (mid-market) to reverse in March is:
R/C Calcs
Mar 12.5
Buy Calls 0.35
Sell Puts 2.25

Synthetic Long Stock: 12.5 + 0.35 - 2.25 =
Sell real stock: 10.60
Receive: $11.40 - $10.60 = $0.80

$0.80 implies 58% to March expo. i.e. Pay 58% (annual) to borrow TLB to March expo. If the trade was good by 11.40 - 10.27 = 1.13 and you have to pay 0.80 to be short, the trade is less good. Take into account that the short rate can get much higher and the risk that shorts may be forced to buy the stock back on a huge rally (short squeeze), this goes from a clear arb, to a not so clear trade.

Adding a little more uncertainty to the outcome is this news: "Talbots shareholder sues retailer over Aeon deal." You can read that article from Reuters: HERE

My conclusion - definitely not a "risk free" arb...

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InterMune (ITMN) - FDA Advisory Committee & Skew

ITMN is trading 16.10 with IV30™ up more than 100%. The LIVEVOL™ Pro Summary is below.



The company has traded over 35,000 options today in the first hour on total daily average option volume of 2,317. The Company Tab snapshot is below (click the image to enlarge).



News
BRISBANE, Calif., Feb. 1 /PRNewswire-FirstCall/ -- InterMune, Inc. (Nasdaq: ITMN) announced today that the U.S. Food and Drug Administration's (FDA) Pulmonary-Allergy Drugs Advisory Committee (PADAC) is scheduled to discuss the company's New Drug Application (NDA) for pirfenidone on March 9, 2010. Pirfenidone is InterMune's investigational drug candidate for the treatment of patients with idiopathic pulmonary fibrosis (IPF).

Note the committee meeting date - 3-9-2010. This means Feb options are out of the loop and March options are very much in it. The Options Tab snapshot is included below - note the difference in the monthly IV and the volume in March.



Another way to look at it is through the skew charts. Two different snapshots are provided (one rotated). You can clearly see how the red month (feb) is substantially lower than the others. Note also the skew shape.





You can see the front month (red) has a fairly normal skew shape - but this month is "out of the game." You can see how the other months are yet to determine a real shape - in fact the downside for the fourth month (blue line) goes down then up. You can see similar kinks in the green month (third month). This happens when news comes out and the determination of possible outcomes are yet to be priced in. This is in a real sense, market discovery. The uneven skew is an explicit example of that. Hypothetically, if you had a good grasp on this event, you could take advantage of the mis-shaped skew (if it is in fact mis-shaped) while at the same time forcing it to take the right shape with your order flow.

The general thought process about bio-techs with decisions upcoming is that the ATM straddles are underpriced and then skew is over priced. If that's the case you expect a steep skew on both sides - we do not see that yet. Of course, following a "general" rule on bio-techs is about as risky as it gets - selling cheaper options on something that can explode up or down isn't exactly a comfortable way to make a living - very risky.

The Charts Tab snapshot is included below for an additional source of analysis.



You can see the IV30™ (red line) spike versus the HV20™ (blue line) along with a recent stock up-swing.

I will try to keep an eye on the skew shape and post updates if appropriate.

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