ATVI Options Chain!?

[whatstheofficerproblem]

Ok, I am new to options, but looking at ATVI's option chain, I find it confusing. MSFT wants to buy ATVI at $95, The OTM call option for Jan 2024 at strike price $95 is currently trading for 0.74, assuming that the deal goes through and finalizes in July 2023, the stock goes to $95, according to Option Profit Calculator, the return is 400+%, seems too good to be true. What exactly am I missing here, please help.

[gfp]

The "option profit calculator" doesn't know the security ceases to trade after the deal closes or that there is a cash merger deal on the table.  If the scenario you lay out occurs you lose 100% of your money buying a $95 call.

[lnofeisone]

Without knowing what you are looking at, it seems like you are trying to model an edge case. My guess is that you are modeling 2024 Jan call and pricing the underlying at $95 for July 2023. The extra value comes from the intrinsic volatility and time components of the option price. However, the calculator doesn't know that you selected an edge case and the stock will never rise past $95 (unless you think MSFT will raise its bid).

 

If this deal closes in July 2023 for $95 and you paid $0.74 for 95 Jan 2024s, you will lose $0.74. If the deal close in Jan 2024 for $95 and you paid $0.74 for 95 Jan 2024s, you will lose $0.74.

[whatstheofficerproblem]

40 minutes ago, gfp said:

The "option profit calculator" doesn't know the security ceases to trade after the deal closes or that there is a cash merger deal on the table.  If the scenario you lay out occurs you lose 100% of your money buying a $95 call.

 

Thank you guys!, that explains why they are so cheap relative to the $90 strike. But then if I buy $90 strike for 3.35 per option expiring in Jan 2024, and the deal closes 2023 July for $95, wouldn't I make like 140%, I'm trying to make an arb play with max profits as opposed to the standard 25% I'll get for just owning the stock outright. Will this work?

[gfp]

12 minutes ago, whatstheofficerproblem said:

 

Thank you guys!, that explains why they are so cheap relative to the $90 strike. But then if I buy $90 strike for 3.35 per option expiring in Jan 2024, and the deal closes 2023 July for $95, wouldn't I make like 140%, I'm trying to make an arb play with max profits as opposed to the standard 25% I'll get for just owning the stock outright. Will this work?

 

In your example, if you pay $3.35 per contract for the 90-strike and the deal closes at $95 you would have a profit of $1.65/per share (x100 per contract).  This would be a return of about 49%.  No idea where you are getting 140% from.

[lathinker]

In that case, you will have paid 3.35$ and get back 5 $ (95-90) for a 50% profit.

One way to bump this is a call spread. You could buy a Jan 24 80 call at 8.70 and sell a Jan24 90 call at 3.30. You are investing 5.40. If the deal closes, both options are exercised and you will get 15$ on the C80 yet lose 5$ on C90  for a return. In total you will make 10 on an investment of 5.40.

 

Note that option trades can be very risky, in particular if there is a delay you will lose 100% of your money while the stock is still likely to be worth something.

 

[ACooke]

1 hour ago, lathinker said:

One way to bump this is a call spread. You could buy a Jan 24 80 call at 8.70 and sell a Jan24 90 call at 3.30. You are investing 5.40. If the deal closes, both options are exercised and you will get 15$ on the C80 yet lose 5$ on C90  for a return. In total you will make 10 on an investment of 5.40.

I've never really spent any time learning about call spreads and so forth.

The goal here is just to juice your return, rather than lock in a spread or similar - as you might see done with long/short hedging and so forth.

 

• So if the deal closes you're return is the spreads  ($15 - $5 = $10). Plus and minus the premiums ($3.30 -$8.70 = $5.40) = $4.60. So 186% is returned (86% ROI).
• This is better than buying the $8.70 call in isolation and the deal closing, returning 172% (72% ROI).
• Similarly the $3.35 $90 call nets less again at ~50%.

Now I've typed the out a feel a little dense and the above seems clear.

If I'm missing something I'll go ahead and spend some time on it myself rather than asking to be spoon fed.