Last week, I posted that I thought the EBIX merger arb was potentially attractive. If that post wasn’t your cup of tea, than this post certainly isn’t going to be up your alley either.
To review, I think EBIX is an attractive merger opp. The short case centered around the company being a fraud. I think the MBO takes that off the table. Given how public the short case was, there’s no way that Goldman didn’t do their due diligence into the short case and get comfortable with the risks before entering into this transaction. With that risk off the table, I think the company looks extremely cheap at the take out price, and I could see a strong argument to be made for a higher bid coming during the go shop period.
So I originally recommended taking advantage of the depressed price by buying the stock. But I think there’s actually a more interesting way to do so. The price of the puts is incredibly high. Check out the screen shot below
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If you think, like I do, that the deal is likely to go through, then those puts are very attractive. If the deal goes through, the puts expire worthless and you’re paid well more than 5% for the money you set aside to cover those puts. That’s a pretty attractive spread!
It’s true that you give up the upside of a higher deal coming along. I personally think some of the calls are also pretty cheap compared to the possibility of a higher deal. I think this makes sense too- nervous longs are probably buying puts and selling calls to finance those puts. I’m happy to sell the volatility to what I think are panicked buyers.
Again, there are certainly risks to this type of investment, and I’m no options expert. So please do your own research (hopefully yesterday’s post convinced you to!)
Disclosure: Long EBIX calls. Short EBIX puts.