Morning Note from Tabak

DISCLAIMER: NOT MY RECO

MIL ? Yesterday the company confirmed that they are evaluating strategic alternatives and hired GS as an adviser.  TMO has indicated interest with a $6b bid that would put valuation into the low-to-mid $90s.  However, the options market was extremely active for a usually very thin name.  The Mar 90 calls were peppered 500 ? 1000 blocks, which seems logically.  However, the bulk of the action was in the March 95 and 100 calls, where one large investor purchased a Mar 95/100, 1×2 call spread for a 0.50 debit, 3000/6000 times.  This position pays 4.50 @ 100, as this investor believes that potentially DHR and GE may have interest, as this investor believes a potential deal will be for $100, but not higher than 104.50.  Judging from the overall option volume, it is very clear that the majority of options traders are pinning their hopes on $95 – $100 valuation.  I think the 95/100, 1×2 call spread is an excellent way of playing this cheaply for the believers.  However there is something very odd with the later month contracts.  The trading in the Aprils and beyond was small, if not bordering on normal.  The company has not set a definitive timetable for completion of its evaluation; yet options traders are piled into March and no where else.  We believe this transaction will get done eventually and in an auction format.  With majority of large holders in MIL being short term hedge funds, one would think that the pressure on management to sell will be great and will hold up shares in the process.  Considering that a soft auction has already been in motion for a good time now, it is very possible that we could see quick auction results like we did in the RX deal.  Here?s what I want to do.  Grab some upside exposure that gets you maxed between $94 and $100.  Then sell, sell, sell March credit put spreads all day long.  The volatility is so amped in these that you can sell the Mar 80/75 put spread for a 0.70 credit, the Mar 85/80 put spread for a 1.30 credit and the Mar 90/85 put spread for a 2.05 credit.  I implore you take advantage of these vol levels and sell put spreads.

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~ by largecaptrader on February 24, 2010.

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