Opportunities for option traders on the takeover of Time Warner

Back in late October, I wrote that AT & T had reached an agreement in principle to buy Time Warner for about $85.4 billion, Time Warner shareholders would get a combination of cash and AT & T stock. The total purchase price would be around $107.50 and the whole process could take around a year to complete.

Click here to read “Looking for option trades on the Time Warner takeover by AT&T”

The stock price of Time Warner was trading at around $86.75 at that time which was way below the takeover price. I suggested two option trades with April expiry dates and one that didn’t expiry until Jan 2018. All three trades turned out profitable.

  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.

Results: Time Warner stock was called away at $90.00 in April for a $6.25 profit or 7.46% in 6 months.

  1. 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 option for $3.80 reducing the purchase price to $79.95 a share. ($86.73-$3.00-$3.80 = $79.95)

Results: Time Warner stock was called away at $90.00 in April and the put option expired worthless. Profit of $90.00 – $79.95 = $10.05 or 12.5%

  1. 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.

Results: Time Warner stock closed at $99.18 on Friday, I still have 8 more months to take profits. I could sell the Jan $97.50 call options for $6.05 on Monday for a profit of $6.05 – $3.50 =$2.55 or 73%

Being a senior, I totally forgot about this post, I have to apologize for not providing an update sooner. However, I repeated option strategy number 2 by buying 500 shares of Time Warner at $97.50, selling 5 May 97.50 call options for $1.95 and 5 May 97.50 puts for $1.45 (which reduced my purchased price to $94.10) and made $3.40 or 3.6% in one month.

Unfortunately, the VIX which is the ticker symbol for the Chicago Board Option Exchange volatility index has been falling. It measures the market’s expectations of 30 day implied volatility. (Referred to as the fear index) A falling VIX means a reduced amount of fear and cheap option premiums.

Despise the lower possibility of profit, I repeated option strategy number 2 and bought 500 shares of Time Warner at $98.96, sold 5 June 30 100 call options for $1.00 and 5 June 98 put options for $1.00 reducing my overall cost to $96.96 per share. I could potentially make $3.04 if TWX is above $100 by June 30th or 3.14.%

A falling VIX tends to widen the bid / ask price spread on most options. It makes it harder to get your order filled. I had to change my limit order a couple of times during the day to get this Time Warner trade completed.

There is always a risk that this deal will not be approved by regulators. However the takeover price gap has narrow from $86.75 / $107.50 in October to $99.18 / 107.50 in June. A good sign that investors believe that this deal will go through.

Disclaimer: This post is for educational purposes only.