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Tilray (TLRY) Aphria (APHA)merger arbitrage


willie2013
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The WSB/Robinhood crowd has apparently moved on from GME and AMC and is squeezing Tilray.

Current after hours quotes are $72 for Tilray and $28 for Aphria.  This link speaks to the arbitrage. I believe the deal will close. Is there a way to speculate on this with options without shorting Tilray (which is hard to do and has high borrow).

 

https://www.google.com/amp/s/www.fool.com/amp/investing/2021/02/10/aphria-is-becoming-the-stock-markets-biggest-merge/

 

-Willie

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Crickets... just like my OSTK post when it was $50. I know we are value investors and don’t like being

outside a circle of competence and that compounding is a way to wealth and tax avoidance...etc  but geez let’s make some money here by sharing ideas and discussing opportunities.

 

-Willie

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J and J is in the mushroom ETF at five percent . I think cannabis is more investable of course but perhaps look to a country like Israel and their drug developing expertise. It seems the drugs from the pot plant work on more physical type ailments while drugs from mushrooms are trickier and work on the psyche (depression etc. ) which is a harder clinical research based “sell”. Appreciate the response though greatly.

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Agree 100% that shorting Tilray to buy Aphria is stupid. Was wondering if the duration of the deal close and likelihood could somehow figure into different time and strike calls/puts in  Tilray/Alphria somehow. to make a value / risky bet? It would be the kind of thing that might involve harvesting /selling the high volatility in the options to take advantage of the WSB/RH.  Perhaps just having a trade ready when news breaks would be the play.  GME was obvious at $450 but I didn’t have a trade ready when the news changed. This is interesting because Aphria is being dragged along with the squeezed Tilray but Aphria is the much better company in my opinion. It does seem binary to me though. If merger happens Tilray goes down more than Aphria goes down.  And if merger doesn’t happen they both go toward prices somewhat above the pre- merger prices. Thanks for the comment.

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Looking at the option chain I could not find a hedged way to do it (which does not mean there isn't one...). IVs are so high that credit spreads don't bring in enough.

 

If you are willing to go naked, selling TLRY July or January 2022 calls, and buying APHA (at the merger ratio) from the proceeds should work. Select the short call strike so your net cost is 0. If you can stand the possible short squeeze in terms of your margin...

 

I might put on a paper trade. Too risky to do with enough money to move the needle in real life.

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J and J is in the mushroom ETF at five percent . I think cannabis is more investable of course but perhaps look to a country like Israel and their drug developing expertise. It seems the drugs from the pot plant work on more physical type ailments while drugs from mushrooms are trickier and work on the psyche (depression etc. ) which is a harder clinical research based “sell”. Appreciate the response though greatly.

 

Good point. Thanks for the feedback.

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On 2/11/2021 at 12:30 PM, backtothebeach said:

Looking at the option chain I could not find a hedged way to do it (which does not mean there isn't one...). IVs are so high that credit spreads don't bring in enough.

 

If you are willing to go naked, selling TLRY June 2021 or January 2022 calls, and buying APHA (at the merger ratio) from the proceeds should work. Select the short call strike so your net cost is 0. If you can stand the possible short squeeze in terms of your margin...

 

I might put on a paper trade. Too risky to do with enough money to move the needle in real life.

 

Paper trades Feb 11, 2021, 11:40am EST:

 

Long 120 APHA @ 19.00

Short 1 TLRY Jan 2022 17.50 call @ 23.60 (@ bid + 25% of bid-ask spread)

Net: $80 (credit)

 

Long 120 APHA @ 19.00

Short 1 TLRY Jun 2021 18 call @ 22.60

Net: -$20 (debit)

Edited by backtothebeach
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  • 3 weeks later...

Looking at the option chain I could not find a hedged way to do it (which does not mean there isn't one...). IVs are so high that credit spreads don't bring in enough.

 

If you are willing to go naked, selling TLRY July or January 2022 calls, and buying APHA (at the merger ratio) from the proceeds should work. Select the short call strike so your net cost is 0. If you can stand the possible short squeeze in terms of your margin...

 

I might put on a paper trade. Too risky to do with enough money to move the needle in real life.

 

Paper trades Feb 11, 2021, 11:40am EST:

 

Long 120 APHA @ 19.00

Short 1 TLRY Jan 2022 17.50 call @ 23.60 (@ bid + 25% of bid-ask spread)

Net: $80 (credit)

 

Long 120 APHA @ 19.00

Short 1 TLRY Jun 2021 18 call @ 22.60

Net: -$20 (debit)

 

Wrapping up this arbitrage trade, I just discoverd that IB can graph these combos. Both trades have been at an overall profit of about $1000 for a while. Waiting for expiration is a bit long, and who knows what will happen to the merger (since these were paper trades I haven't paid attention).

 

So the opportunity was definitely there when the OP saw it. Hard to quantify what the max risk was, though. What could have been the worst short squeeze spike in TLRY? 10x maybe? Also the merger could have fallen apart, with TLRY permanently disconnecting from APHA.

 

Edit: Also APHA could drop below $9, in which case the combo could never be worth more than $1100 (long 120 shares).

APHA1.thumb.gif.9c10a319aba5bca34e72b4158cf5ef8f.gif

APHA2.thumb.gif.b43ccc1f587f56e5d9acfe797738ecfd.gif

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