Calendar spreads & risk arbitrage

[toryj]

I'm wondering if it's possible to profit from cash tender offers using calendar spreads.

Roche, for example, is offering $95 per share for the stake in Genentech (DNA) that they don't already own.

I used the optionsXpress trade calculator for an Apr 90/Sep 90 calendar spread but the P&L looks unreal; what am I missing here (apart from the obvious fact that I haven't fully wrapped my head around this strategy)?

Here's a screenshot of OX's P&L diagram:

 

[JJacksET4]

Well, I am no expert in takeovers nor in this deal, but I looked it up quickly and saw "A majority of shares besides Roche's still must be tendered for the deal to happen, with a deadline of March 25."

The problem is very simply this - assuming the deal goes through at $95, the IVs on both month's options will fall to near 0, thereby making the value of each $500, or $0 for the spread total.

On the other hand, if the deal collapsed, DNA could fall quite a bit, making the short options cheap and the long options could still have some value, but I wouldn't count on the short options to collapse.

To test what will happen if the deal is finalized, set the parameters in OptionsXpress to assume a 0 IV and you will see the problem.

The chart in OX basically looks like it would if there was no deal and if DNA for example was $90 at April expiration - the Apr 90s would be almost worthless, but the far month would still have quite a bit of value. Again though, I would assume the deal will go through - which will tank the IV on both sides to near 0, which will make the calendar spread a 100% loss.

JJacksET4