Looking for option trades on the Time Warner takeover by AT & T


AT & T has reached an agreement in principle to buy Time Warner for about $85.4 billion, Time Warner shareholders will get a combination of cash and AT & T stock for a total purchase price of $107.50 per share.  AT&T is confident that they will be able to win U.S. antitrust approval for the deal, but regulators would likely put some conditions on getting approved. The whole process could take around a year to complete.  

Why is the stock price of Time Warner trading so far below $107.50?

Although the deal have been announced, Wall Street believes that there is less than a 50% chance that this deal will actually get done.  A year is a long time to wait for Wall Street traders, they don’t like the fact that AT & T will borrow 40 billion and issue more shares to finance this deal.  Plus, Donald Trump has already promised to stop this takeover from going through if he was elected.

Time Warner share price closed today at $ 86.74 down $2.74 which is a far cry from the takeover price. The average daily trading volume on this stock is around 4 million but 46 million traded today. This represents a lot of early profit taking by Wall Street. The risk reward of buying some shares of Time Warner is very tempting. If the deal goes through, the upside is just over $20.00 a share.  I think that the downside is somewhere between $7.00 to $10.00 per share.

Three possible trades that I am considering:

  1. Buy 300 shares of Time Warner at $86.75 and sell 3 April $90 call options for $3.00 each. This reduces the adjusted cost base to $83.75 and I am hoping that these call options will expire worthless. This would allow me to repeat this type of trade again in April. (Total investment of $25,125 U.S.)
  2. Buy 100 shares of Time Warner at $86.75, sell 1 April $90.00 call option for $3.00 and 1 April $85.00 put for $3.80 reducing the purchase price to $79.95 a share. ($86.73-$3.00-$3.80 = $79.95) (Total investment $7,995.00) Downside I will own  200 shares at an average cost of $82.48, upside if both options expire worthless is gain of $6.80 or 7.85%
  3. Buy 10 Jan $97.50 call options for $3.50 that expire in 2018. If the deal goes through, these options could be sold for $10 each. (Total investment of $3,500.00) Potential gain of $10,000 – $3,500 = $6,500 or 186% however the potential loss is 100% or $3,500 if deal is cancelled.

Before I decide to initiate a trade, I like to look for any unusual option trading volumes for both April 2017 and Jan. 2018.   I found that 4,000 April call options and 2,000 April put options traded today.  The Jan 2018  calls to puts was a lot closer, 7,000 to 5,700 traded.

With the U.S. election just two weeks away, which trade if any who you recommend or would you wait?





5 thoughts on “Looking for option trades on the Time Warner takeover by AT & T

    • Selling a cash secured put was another trade that I looked at. The April $80 put option premium would have only earned a 2.3% yield on my cash. I prefer a 4% to 5% yield on my cash.


    • I consider owning more shares in # 2 would be negative because it would be a sign that the takeover isn’t going to be approved. The risk is that TWX would fall in price below my break even of $82.48

      I view cash secured puts as risky so I want to get paid a lot more than 2% on the cash that remains uninvested, opportunity cost.

      Liked by 1 person

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