BJ's Wholesale (BJ) - Time Spread on Takeover

BJ is trading $46.44, up 0.4% with IV30™ down 1.0%. The LIVEVOL™ Pro Summary is below.



The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.

Custom Scan Details
Stock Price >= $5
Sigma1 - Sigma2 >= 8
Average Option Volume >= 1,000
Industry != Bio-tech
Days After Earnings >=5 <=70
Sigma1, Sigma2 >= 1

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol Pro™.



It's also available on the Scanner Tab, in the "Trading Opportunities" folder. I've included that snap as well (below).



The goal with this scan is to identify back months that are cheaper than the front by at least 8 vol points. I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated front month vol simply because earnings are approaching.

On 11-10-2010 the stock gapped up more than $5. Here's a news snippet from Forbes:
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Shares of BJ's Wholesale Club are higher on Wednesday on news that the company has put itself up for sale.

The company received a buyout offer from private equity firm Leonard Green & Partners, prompting it to hire Morgan Stanley to conduct an auction process for the company.
Source: Forbes.com. Click to read
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Tricky...

Looking to the Skew Tab (below), we can see the elevated vol in the front month (red line) relative to the second month (yellow line).



I've highlighted the vol difference between the Dec and Jan 45 and 47.5 strikes.

Finally, let's look to the Options Tab (below).



Potential Trades to Analyze
1. Sell the Dec 45/47.5 strangle and purchase the Jan 45/47.5 strangle. This yields a net debit of ~ $1.60 with ~6 point vol scalp. The risk of course, is that the takeover is announced, or rumored, and BJ pops while back month vol collapses. Being long the back month is long vega, so a vol drop is a risk.

2. Do #1, but only purchase the Jan 47.5 calls. This actually yields a $0.20 credit, but is naked short options to the downside. The bet here would be that the stock price is safe to the downside for the rest of this options cycle as the potential takeout acts as a floor to the price.

3. A little more tricky, Sell the Dec 45/50 strangle @ $1.35 to purchase the Jan 47.5 calls for $1.90. That's a $0.55 debit, naked downside again but does win to a takeover because of the off-set strikes.

This is trade analysis, not a recommendation.

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