Hairless in The Milky Way, I don't think there are any layups here, because I don't believe any of us can know what is going to happen. My preferred way to play these two is to go the same way on both. They should move in opposite directions no matter what happens. In fact, I would probably opt for calls on both, as upside can be unlimited and Cien can't have more than another 31 points of downside. But you could still make money on both sides or enough on one to more than cover the nut.
For example, I would look at long calls in Sept struck at $65 on Tellabs and at $35 on Ciena. If the deal falls apart, Ciena will tank, but Tellabs should run back to the 80s. If the deal goes through, Tlab could fall a bit, but Ciena will roar up 15 5o 20 points. And we should know one way or the other by Sept expiration date.
Looking at potential, let's say the deal falls apart and TLAB only makes it back to $75, having lost some credibility. That would give you an intrinsic value of $10, which would be about a double on the two premiums, assuming Ciena expires worthless. If the deal goes through, TLAB is likely to see the mid-50s and Ciena will be there to meet it, giving an intrinsic value of $20 on the Cien calls and a 300% on the entire positions.
But there is also the wildcard possibility that the deal goes through, perhaps at a lower ratio, and Mike Birke is able to convince folks that he is still a sane person. That could see both stocks rise enough for a homerun. And it is certainly possible that TLAB would go to $85 on a no deal instead of $75.
This is risk arb with very little risk. For something like this, I might stretch my 90/10 rules to 80/20. It is a zero one situation and I think they have to say zero or one fairly soon.
MB |
