CBY - Takeover Mania with Options

Discussion in 'Trading' started by livevol_ophir, Jan 13, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    The company is amid a hostile takeover. CBY has formally rejected the bid from KFT of 0.2589 shares + 300 pence.

    The company has traded over 14,500 options today in the first 2.5 hours on total daily average option volume of 1,751.

    The biggest trade of the day was a straddle sale here on the NYSE ARCA floor 3000x. The Feb 50 straddle @ 4.25 (2.75 in calls and 1.50 in the puts).

    The Feb 50 straddle makes money if the stock at expiration stays between 45.75 - 54.25.

    So what's going on? note CBY price is $51.13

    First, the original news implies this (from above):
    Takeover price: 0.2589*(29.47) + 4*(3.00 BritishPound)*($1.6292/1 BritishPound) = $50.07 which is above the current price.

    NB: The ADR is four times the European stock. 100 pence = 1 British Pound. $1.6292/BritishPound is current conversion rate.

    The story:

    KFT has stated they will increase the cash portion of the deal (300 pence) and reduce the fraction of shares. They will not change the overall value of the bid.

    CBY does not want the hostile bid from KFT - they have formally rejected it.

    <b>Third</b> (from theflyonthewall.com new service).
    CBY is hoping for a deal with Hershey (HSY). The NY Post reports Cadbury's CEO Todd Stitzer hinted that he might be open to a merger with Hershey (HSY). However, The NY Post reports that a source said the company is less interested in a merger than an outright acquisition, with the Hershey board expected to decide within days whether to put together a bid to buy Cadbury. Hershey has until Jan. 23 to submit a bid.

    <b>Fourth </b>(from theflyonthewall.com new service).
    The Financial Times (FT) reports:
    Italian chocolate maker Ferrero is close to abandoning its attempt to acquire Cadbury. Ferrero had been considering the possibility in partnership with Hershey (HSY).

    The Wall Street Journal reports that Cadbury reported sales gains and re-iterated a rejection of Kraft's bid - 2009 revenue and margins gains and a positive outlook for 2010 reinforces its defense against Kraft.

    <b>Sixth </b>(Wall Street Journal "Heard on the Street" today).
    Kraft must raise their bid for CBY to complete the takeover. It is valuing the company at 767 pence. It needs to be not less than 900 pence which would still be below expected 2009 EBITDA.

    900 pence would lead to this price:
    (900/763) * 50.07 = 59.06

    Warren Buffet is a large shareholder of KFT through Berkshire Hathaway and personally. He controls 9.4% of the float and is the largest shareholder. He does not agree with the takeover, claiming dilution of the KFT shares.

    So the takeover price is hostile and rejected. It is a floating price with a greater amount possibly given in cash. Throw in the fact that Warren Buffet is the largest shareholder and is rejecting the bid as well.

    This all leads to vol in the options.

    You can see details, prices, trades, news and charts on my blog here:
  2. TraDaToR


    Your option plays are really interestigng, Ophir. Just wanted to point it out as nobody seems to respond to your calls.
  3. livevol_ophir

    livevol_ophir ET Sponsor

    Thanks man. That was really nice.

    The ANDS, KONG, MJN, SOLF blogs were actually all picked up by Bloomberg and posted on their terminals.

    The blog is the fastest growing option blog in the world... but yeah, not much love here...

    Different strokes I guess...
  4. lescor


    I read them all and really enjoy them. Keep 'em coming.
  5. livevol_ophir

    livevol_ophir ET Sponsor

    Thanks lescor, I really appreciate it.
  6. I like the blog as well. Just checked it out yesterday. Keep it up.
  7. KILLER blog

    I just added to my RSS feed. Keep up the great work!!
  8. gobar


    ur blog is in my bookmark list but problem is i have checked 5 to 7 options which u posted stocks changed little despite heavy volume.
  9. livevol_ophir

    livevol_ophir ET Sponsor

    First, thanks for bookmarking.

    My blog is designed to uncover order flow, vol, takeovers and other unusual issues (stock swaps, etc). It also focuses on using the Livevol Pro application to do analysis. By no means do I intend to predict movement or in anyway to offer advice.

    I simply hope to illucidate how traders on the floor look at prop trades. A huge portion of trading is based on market making (not prop trades - but I can't blog on that).

    Also, I post the trades I see that I commit to memory or try to commit to memory). I assure you that every thing I post I discuss with a couple of other traders (at least). With rare exception, each one illicits a fairly serious discussion (in trade talk, that's 1 min or more).

    Most times we do nothing, sometimes we do below. BUt everything that is in there is worth noting - or so I believe - otherwise I wouldn't bother anyone with it.

    See below, perhaps that helps.

    --- from a previous post ---
    There is no average trade.

    (1) Sometimes I see people paying up for options and I offer them to get what I perceive as edge based on my theo. If it's one line specific I can often times spread it off for a lot of edge because a kink develops in the skew on one strike.

    (2) Sometimes I piggy back order flow but do the trade for better prices than the size.

    (3) Sometimes I do nothing or pair trade. i.e. get same delta bet but pay less vega by combining (1) in the heavy trading stock and (2) in a highly correlated stock; where I am looking for the generic linear correlation, not any other rank.

    Usually I just observe and remember the big bets. If they are winners twice, three times in a row in the same stock with similar bets, I go for strategy (2). If there is no reason to believe they are winners, I follow number (1).

    Of course, many times, I do nothing b/c I do not perceive edge in either side.

    Following order flow is rarely the obvious piggy back trade (though it can be). Trading is a game of memory. If you can't recall big trades 3-6 months ago in stocks you follow, you will have trouble trading.

    Simple test: Can you remember the biggest trade you did every day of the week for the last 2 weeks even if things were uber slow? If you can't, it's probably trouble. If you can, you are probably making money trading.


    Simply stated, the blog is my stream of consciousness throughout the day. I check hundreds of trades a day and try to remember 1-5 on average. I share 1-2 to two of those on the blog.

    I hope this clears up my purpose and thoroughly enjoy the give and take here.