KMG Put fun

Stuff makes my head spin, especially with the possiblility of the entire deal falling through (its in the filing), a delay (happens often enough), and various other outlier events.

There's something like 5% short now, so even a 25% buy back only kicks that up to 6.6% or so, unless you think they are piling on shorts here. Is a buy in really likely? Maybe, if so many shares get tendered that there's no free float left. Not sure, but tendered shares are probably not eligible to be loaned.

I plan to get involved, but will wait till after earnings, hopefully the price does not move up too fast, or at all.
 
With Sears/Kmart, there were 0 shares to borrow the last week of the deal. I think this one will be a little easier since JANA and Icahn are definately tendering.
 
kmg 79.52

May contracts

strike: (call, put)
55: ( 23.9-25.1, NB-0.25 )
60: ( 18.9-20.1, NB-0.25 )
65: ( 13.9-15, 0.15-0.25 )
95: ( NB-0.05, 17.2-19.5 )

with the current kmg option prices, you can put on a reversal with the 95 strike and basically load up the synthetic for less than the common. the problem is that you might end up with short stock if you don't already own any. you don't have to worry about the puts getting exercised because marketmakers shouldn't want to get rid of shares. theoretically, if a synthetic short is created to substitute using the 55 strike, you end up with a conversion, thus, completing a box. you can actually use the 65 level puts for better protection instead since they are offered at the same cost. if you do all of this, you are essetinally generating a nice 0.8 credit per box. so yeah, all those are prices and the theoretical credit are juicy, but it's not going to work because the calls *will* most likely get exercised immediately and you will lose on them on the intrinsic level. plus, and you'd be left with an imperfect, unhedged position and be exposed to any further market risk. if kmg were european style options though, then it'd be a different story...
 
One 'rule' with options - there is NO free lunch!

They are priced perfectly at most times. There is nothing that you could spot that someone else (a pro) has not already seen and priced for.

Unless you like paying up for extra high IV, don't bother on the play.
 
Explain what the risk is in this trade.

Buy 80 C 1.95
Sell 90 P 12.40
S 150 KMG 79.50


Besides a close at expire > 100 or so.
 
doing that will basically make you long a call spread (or short a put spread) and also short 50 shares. at those prices, if everything goes smoothly, almost any point should be a credit level except for the region beyond the upper limit that you've stated. your main risk of concern though, which is not seen on any graph, is securing your underlying in the event of any buy-in's, which might or might not affect your position. if that happens, then you'll be exposed to market risk to the downside.
 
Yeah, those options MM's are the devil incarnate. Trying to put on a risk free play here seems impossible, which, I imagine is thier goal.

What is the likelyhood of a buy-in of a natural short in this case? Any precident?
Assuming quite a few shares get tendered, will that likely cause a squeeze?
 
Quote from stock777:

Yeah, those options MM's are the devil incarnate. Trying to put on a risk free play here seems impossible, which, I imagine is thier goal.

What is the likelyhood of a buy-in of a natural short in this case? Any precident?
Assuming quite a few shares get tendered, will that likely cause a squeeze?
More...

Well, you have to figure that anybody who does not tender is an IDIOT since the lowest tender price is $85 and the current stock price is $77 and change.
 
Not quite.

First, you didn't answer my squeeze question.

Second, since it's very likely the stock price will drop post tender, at least thats what the market is saying, then you will get less for the shares that dont get accepted. So the average price (tendered + sold aftermarket) may not be much diff than what the price is now.

Like a GM short, it aint always so obvious.
 
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