Monday, April 12, 2010

MIR-RRI Merger - How Skew Reveals Risk

MIR is trading 12.70 up 18.3% with IV30™ down 33.9%. RRI is trading 4.45, up 12.7% with IV30™ down 15.9%. The LIVEVOL™ Pro Summaries are below.

The news is a merger. Nice to see both stocks up substantially on the news - so far the market likes it. The details of the merger are included (click to enlarge).

So 2.835 * RRI = what MIR shareholders receive. As of right now:
2.835 * $4.45 = $12.62. So an $0.08 spread exists; that's very small indicating relative market confidence as of right now that the deal is going to happen.

You can also expect to the IV to converge as eventually these will be the same entity.

I wrote about a call buyer in RRI two weeks ago (on 3-26-10). You can read that post HERE.

Quick Summary from 3-26-2010:
"The Nov 3 calls were bought 10,000 times on a single print... Looking at the stock volume today relative to average (click to enlarge) you can see almost twice the stock volume in just 2 hours. Looking at Time & Sales for the underlying (click to enlarge) there are three 740,000 prints for stock at (or around) the 10:32 Nov 3 Call purchase as well as a 200,000 print. They all look like sales. It looks to me like someone is turning those calls into straddles (possibly on a ratio)."

I thought (and still do) that the calls were turned into a straddle ratio - more calls than puts.

They merger news and market reaction makes that a winner today (but not huge).

While the prices have converged almost immediately to the merger ratio, the skews on the upside have not. Find the Skew Tabs for both MIR and RRI today. Note the same vol levels (convergence) for MIR throughout the months in the upside calls. Then note RRI's divergent vols throughout the months (the calls are highlighted in the charts).

So why is RRI's risk profile different? How about this:
If RRI gives 2.835 shares for each MIR share that's:
2.835 * 144,968,899 shares = 410,986,829 shares... But...

RRI only has 353,270,519 shares outstanding - so they are ~ 57 million shares short. Time to print shares - time to create a risk profile between months since we don't know when that happens.

This is trade analysis, not a recommendation.

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