i rarely use options to trade risk-arb as i m not well versed in options... would value your opinions in how to use options in risk arb... so you are suggesting that when merger deals were made public, the volatility usually get crushed and its a good time to buy to 90 days call options?
My Merger Arbitrage Journal
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i rarely use options to trade risk-arb as i m not well versed in options... would value your opinions in how to use options in risk arb... so you are suggesting that when merger deals were made public, the volatility usually get crushed and its a good time to buy to 90 days call options?
It depends on the scenario @mergerpie
As far as I know in the US, when a cash bid is successful, the options are settled at intrinsic value. So basically IV of zero. That's not the case in other countries or on other exchanges. That's why Monsanto options are all priced at very low values/IVs.
I assume a bid where instead of cash the target shareholders are paid in shares of the bidding company... the options are swapped to ones with underlying of a ratio of the bidding companies shares? Not sure about this one, haven't done this in a while...
In Europe on some exchanges the options are settled on the basis of the IV on the previous close prior to the bid.
In general though... if there's no bidding war in sight, you can expect IV to drop significantly (at least for the first few maturities) because the spot isn't likely to move much until closer to acceptance etc. Nobody wants to bleed theta. But likely OTM puts stay elevated, since the risk is it's not going ahead for whatever reason.
As far as I know in the US, when a cash bid is successful, the options are settled at intrinsic value. So basically IV of zero. That's not the case in other countries or on other exchanges. That's why Monsanto options are all priced at very low values/IVs.
I assume a bid where instead of cash the target shareholders are paid in shares of the bidding company... the options are swapped to ones with underlying of a ratio of the bidding companies shares? Not sure about this one, haven't done this in a while...
In Europe on some exchanges the options are settled on the basis of the IV on the previous close prior to the bid.
In general though... if there's no bidding war in sight, you can expect IV to drop significantly (at least for the first few maturities) because the spot isn't likely to move much until closer to acceptance etc. Nobody wants to bleed theta. But likely OTM puts stay elevated, since the risk is it's not going ahead for whatever reason.
great explanation.. recently i converted some of my long MON shares to long Apr 20 Call $120... i noticed yesterday... May 18 $120 call is just priced about $0.30 - $0.40 more so basically the 28 days theta is worth only $0.30 - $0.40.. it may be great if u want to leverage up your MON profits with a view that the deal nears completion (share gains to close $128) by 18th May...
The Chinese might throw a spanner in the wheel though. They still need to approve... and since the US shot down the Broadcomm/Qualcomm deal, they just might. This trade war isn't helping either....
yes you are right..so i am going in slow...
Qualcomm is committed to NXPI... the raised bid, all the regulatory hurdles gone through... i think what is the main issue now is Qualcomm's proprietary licensing model.. whether this model will apply to the merged Qualcomm/NXPI... China definitely does not want that. Both parties have to work out an ideal solution or licensing model for China...ideally for China, a licensing model similar to Android would help... See how Android has been taken in and customised by Chinese handset makers and that enabled them to compete with western handset makers.. Not helping is the current trade issues which obviously slowed down the discussions..
if it fails, i see a sub-$100-$110... definitely not $90s anymore..that was 2016's valuation