Sprint (S) - PCP Violation

[monkeyjoe]

All -

Long time lurker - first time poster. I noticed an apparent arbitrage opportunity (PCP violation) in Sprint (S), and it's not based on dividends. Rather, I think it has something to do with their pending merger.

If someone were to try to arb this via reverse conversion (short stock, short put, long call), is there a way to estimate how they could get burned and by how much? I'm obviously only posting this because I'm too scared to ride the lightning myself.

Picture attached, and merger announcement in next post.

For comment.

 

[monkeyjoe]

Above post has the option chain, attached to this one is a screen print of the salient parts of the announcement. Here is a link to the rest:

http://newsroom.sprint.com/article_display.cfm?article_id=2420

Sorry for the delay... apparently first-timers have to wait a while to get their posts approved.

 

[monkeyjoe]

Lemme see if I can explain the question a little better. Sprint is currently in the high $5 range ($5.92 right now), and it's been hovering there for months.

Basically, if the deal goes through, SOME shareholders can cash in at $7.30 a share and others will own diluted shares of the new company, but that new company will have a lot more capital. Since Softbank gets to buy up shares at $5.25 and will have a warrant to buy many more at that same price, is that a fair estimate of where the price might go? If not, what's to stop all existing shareholders from electing to be cashed out at $7.30?

Well, the problem is they are only proposing funding the cash redemption at $7.30 for 55% of shares outstanding and they prorate over all redemptions, so if you elect along with others then your $7.30 payout could be prorated down into the $4 range.

The fat spread on the reverse conversion (like $1.25 a share) compensates risk that your short stock will get called away during the mass of redemptions, coupled with unpredictability in the liquidity of your short puts at the same time. There doesn't appear to be any risk of dividends being issued out of the new capital, though.

Any thoughts? Stuff I'm missing? I'm trying to come up with a way to peg the max downside on this trade. Is it possible that the holder of a short stock position is responsible for the full $7.30 cashout? or at least the prorated amount?

MJ