Monday, November 23, 2009

Barnes & Noble (BKS) - Poison Pill & Reversal

BKS is trading at ~ 22.60 as of Monday morning. You can see the Livevol Pro Summary below. Note that a dividend is forecasted for Dec expiration (this will be important to remember later; click on the image to enlarge it).

Taking a look at the Livevol Pro Options Tab, specifically the Dec 22.5 line you can see an unusual disconnect (click the image to enlarge).

The stock is hard to borrow (HTB) - meaning literally, finding long stock and borrowing is difficult because there is so much short interest (few long shares to locate/borrow and then short). HTB is not terribly unusual, but the rational for BKS is in fact quite unusual - leading to a potential trading opportunity.

BKS has a poison pill provision ("shareholder rights plan") which gets activated upon stock accumulation from an outsider. The reasoning: To protect against "efforts to obtain control of the Company that are inconsistent with the best interests of the Company and its stockholders."

"The rights will be exercisable if a person or group, without Board approval, acquires 20% or more of Barnes & Noble's common stock or announces a tender offer which results in the ownership of 20% or more of Barnes & Noble's common stock. ... If the rights become exercisable, all rights holders (other than the person triggering the rights) will be entitled to acquire Barnes & Noble's common stock at a 50% discount." (Click Here for Source)

Specifically, billionaire investor Ronald Burkle has been buying stock since early-mid November and now reportedly holds ~25% of the outstanding shares. I like the name "shareholder rights plan." Of course, this could be construed as undermining shareholders and entrenching management - tomato/tomatoe...

So what does this mean for the options? Looking back to the Dec 22.5 line you can reverse bid to offer the bad way (buying on offer, selling on bid) and receive money.

NB HINT: How did I know? Look at the IV values for the calls and puts above - they are completely divergent.

Sell Dec 22.5 Put @ 1.85
Buy Dec 22.5 Call for 1.20
Sell 100 stock @ 22.60

Receive = 22.60 - (Synthetic Long Stock)
= 22.60 - (Strike + Call - Put)
= 22.60 - (22.5 + 1.2 -1.85)
= 22.60 - (21.85)
Receive = $0.75

Take away the $0.25 dividend that short stock pays -->
Receive = $0.50

This implies -32% short rate to borrow stock to Dec expiration. If one is able to get slightly better prices than simply lifting the offer and hitting the bid, maybe you can receive ~$0.60.

In other words, if you can borrow the stock for less than 32% (38% if you receive $0.60 in the reversal), it's an arb - right?

Not quite. There are rights associated with the long shares (which the short shares have an obigation to deliver). This right implicitly has value - and is therefore also a part of the pnl calculation. Also, the rate can go more negative on your borrow, as the rate is not guaranteed day over day (amongst other things like buy in risk and REG SHO risk).

Of course, one could forgo selling stock and create a long position equivalent to purchasing 21.85 ($0.50 less than 22.60 market price after accounting for dividend). Sounds pretty good - unless... (1) Poison pill is swallowed; then the stock is cut by 50%. That would hurt. Or, of course, stock goes down below synthetic purchase.

This is an interesting event in an otherwise less than interesting market.

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