Mergers and Acquisitions: BUD

The large Dutch spirits company, InBev, just bought Anheuser-Busch, the brewer of Budweiser.

Mergers create special situations for traders.

The premium you get for selling options is larger if the distribution is wider.  The wider the distribution, the more the stock price varies.  So you want to sell the widest distributions only if the risk warrants it.

Two Separate Peaks

Since there is a possibility that the merger doesn’t go through, there are two widely separated peaks to the probability distribution of the stock price.  One peak is centered on the price distribution for BUD as a stand alone company, the other peak is near the price the acquirer is willing to pay for the company.  The purchase price is usually above the market price of the stock, to entice shareholders to part with their shares.

Because there are these two peaks, that makes the option look like an option with a very fat distribution.  That makes the premium very high.  But you are paid for the possibility that the merger doesn’t happen and the target, BUD in this case, falls back to its original price.  Then you will be put with the stock.  If it looks like the merger is going through while your option is decaying you earn a good premium.

So it is safest to do this early in the process, before there might be funding problems or the acquirer feels buyer’s remorse for paying too much.

BUD

On November 4 and 5th I sold some BUD options for $1.45 and bought them back November 12th for $0.55.  This was before I set automatic stops to buy in the options.  Still a good return for a week’s exposure.

To get a free CD with more options income strategies, click here watch the video,  and add to cart.