<buy atm calls on tvgia rather than gmst? Even if gmst remained flat, the arbitrage spread would guarantee spectacular results upon consummation, wouldn't it?>
Well, NOTHING is GUARANTEED...
GMST closed today at $65-3/4.
TVGIA closed today at $36-1/4.
If the merger was approved and comsummated TODAY, TVGIA would be worth $65.75 x .6573 = $43.22, or 19.22% higher.
However, that's not the case - instead, four things will determine the absolute price of TVGIA in the short run:
1) TVGIA's fundamentals
2) The market's perception of the probability of the merger being approved
3) The absolute price of GMST stock (TVGIA will loosely track GMST's price)
4) Assuming that the merger is approved, the time which elapses between approval and actual conversion of shares.
If the merger is approved tomorrow, I'd guess that TVGIA shares will immediately "pop" up by a maximum of 20% (short-covering effects) but will settle at around a 12%. The rest of the discount will close over time until the share swap actually happens. All the while, the absolute price of TVGIA will be swung around by the price of GMST.
The implied vol of Aug ATM options for both TVGIA and GMST appears to be around 103%, which is definitely not "cheap". In comparison, MSFT Aug ATM calls have an implied vol or only 39%.
If you can swallow the risk, the most profitable trade may be to either SHORT TVGIA puts to collect the premium to finance a long position in TVGIA calls. To lower the risk, this can be done using a spread, rather than ATM.
Alternatively, simply sell a portion of your GMST and replace with TVGIA ! |
