Merger Arbitrage Blog

Bull Put Spread on $100/$97.5 as a way to play AT&T/Time Warner Merger Arbitrage

Time Warner shares traded down towards $101 in the last two days as AT&T announced profit warnings for its upcoming quarterly report due to the increased pressure from traditional cable TV cord cutting and loss of subscribers. AT&T's stock was down to near 52 week lows of $35.70. 


The merger deal between the two companies is structured such that Time Warner shareholders will receive 1. $53.75 in cash and 2. a consideration of AT&T shares based on the average price of its shares of the last 15 days of trading before the transaction closes. This kind of cash plus stock deal gives some uncertainty as to ultimately how much Time Warner shareholders can get when the deal is completed.


I had attached a table on how much Time Warner shareholders will receive depending on how much average AT&T share prices are:

AT&T Average Share Price Cash AT&T Share Ratio AT&T Share Consideration Total Consideration
41.35 53.75 1.3 53.755 107.505
37.4 53.75 1.437 53.7438 107.4938
37 53.75 1.437 53.169 106.919
36 53.75 1.437 51.732 105.482
35 53.75 1.437 50.295 104.045
34 53.75 1.437 48.858 102.608
33 53.75 1.437 47.421 101.171
32 53.75 1.437 45.984 99.734
31 53.75 1.437 44.547 98.297
30.5 53.75 1.437 43.8285 97.5785
30 53.75 1.437 43.11 96.86


I am putting up a bull put trade by selling $TWX $100 Jan 18 Puts and buying $TWX $97.5 Jan 18 Puts for a total risk of $2.50 per option. I sold the spread for an average of $0.50 each. If $TWX ends up above $100 by the end of Jan 18, the spread will net 20% profit for a period of about 3 months and an annualized return of about 83%.


By getting behind this trade, I am betting on AT&T share price will not get significantly lower than $33 by the time the merger close. Although the stock price of Time Warner is getting dangerous close to the strike price of the $100 put, I think as the last regulatory approvals from Brazil and DOJ comes in, both AT&T and Time Warner's stock prices will increase again. Do note that by buying the Jan 18 spread, if the merger completes before the expiry of the options, the TWX put options will be converted to adjusted T1 put options. Please see below from a statement from OCC regarding this matter:

Pursuant to Article VI, Section 11 and 11A, of OCC's By-Laws, all outstanding TWX options shall be adjusted as follows.  On the business day immediately following the Effective Time of the Merger, each adjusted Time Warner Inc. contract will require the receipt or delivery of: (A) 100 times the exchange ratio (no less than 1.3 or greater than 1.437 shares) of AT&T Inc. ("T") Common Stock; plus (B) $5,375.00 cash; plus (C) cash in lieu of a fractional share of T Common Stock, if any.  Premiums for the adjusted Time Warner Inc. options will continue to be calculated on the basis of a multiplier of 100, i.e., for premium and strike-price extensions, 1.00 will equal $100.  The Time Warner Inc. option symbol will change to T1.  [Any FLEX series that may exist will be adjusted in a similar manner to the standardized option.]  


The drop in traditional cable TV subscribers, although worrying, is a national trend and the adoption of online streaming TV options had already been going on for years. AT&T is also not totally about cable TV as they also had large business and wireless business segments to buffer the effects of cord cutting. The latter two business are less prone to cord cutting. The business solution segment has always been a stable income source while the consumer shift of everything to mobile can still benefit AT&T amids heavy competition from Verizon and T-Mobile/Sprint.

The lowest point AT&T stock price reached in recent years 2012-2017 was $30.97 which will cause the maximum loss for the bull put spread. During this period, a low price of below $33 was reached for 14 of the months, while 47 months the lows never dipped below $33. I know these statistics count for nothing if the market or AT&T's conditions deteriorates but for the majority of time, AT&T managed to stay above $33 and so I am confident that this bull put spread will not produce a loss.

Updated: October 16, 2017 — 7:14 am


Add a Comment
  1. I set up a similar trade but with Nov 17 expiration. What's your take on the recent drop in T price? Are you still holding your position?

    1. Nov 17 is abit too close for comfortable given the drop in T price. I hope the drop in T is just temporary..anyway the options will start taking a loss when T is below $33 but i think the bottom has been established. However be prepared to cut loss if the overall market crashes.. I m still holding my positions…

      1. Thanks. I set my position before the T price crashed dragging down TWX. I was able to adjust the upper boundary of my spread to 95, so I'm holding 92.5 – 95 credit spread, but I agree…it's a little too close to comfort given the weakness in T price. I also noticed how TWX and T don't always track each other in a linear fashion, so that's something else to keep an eye on. 

        I may just close my put spread entirely and just by TWX shares. 

        1. I am holding TWX shares before the heavy T drop… so in the red with TWX with avg of around $103. My put spread was initiated later but also in the red. Keep a keen eye on T as its still volatile and extremely weak… a spike up $34.30 yesterday morning was quashed in the afternoon to close at lows.. I will probably cut some of my positions if T goes closer to $33..below my comfort zone.

          1. My biggest trade is still in $BRCD btw so $TWX is sort of a side trade.

          2. I think yesterday's drop was related to news of Sprint and T-Mobile breaking merger talks. All telecoms were down, including T. But I agree about overall weakness, T has been volatile and it creates a lot of pressure on TWX price. I'm hanging on but have to monitor my positions closely. 

          3. It's not looking good. More weakness from T. I'm going to try to close my put spread now. 

            1. mine are Jan 2018 100/97.5 puts.. under water but still have some time.. I started reducing though… shares under water too.. not looking good also even if merger is completed..will reduce position.. Sometimes we just have to admit we lost.

            2. I am only able to close for $1.20 for some of my puts on 31st Oct… far more than median price quoted. Thats what i don't like about options…you can't exit fast enough at a fair price…

              1. Very good timing closing out my TWX position…hope you got out as well. Several deals going sideways this year due to regulatory delays or rumors. I still thing this merger will happen with concessions but the spread will stay elevated.

  2. Yes you managed your risks well… I didn't manage to get out before the news broke but i close 50% of my long positions after that to reduce the risk. I am leaving some Jan 18 puts open since there is still time for the merger to be approved. I just hope the parties get some agreement… 

    1. What a disaster this has been. I re-entered the trade before the latest news and now firmly in the red. Thought the deal would still get done, now not so sure. 

      1. yes what a disaster!… before the year i was skeptical on TWX. had not touched the merger till sep-oct… i was swayed by news media and investors who predicted the merger will be smooth sailing… so I looked at how I can construct a spread which depended on $T's share price…. I didn't factor in regulatory troubles for the deal…i should have listened to myself! a lesson learned. 

      2. i still have 40% of my original positions…amounting to about $45K…. i cut my risk when $TWX dropped to $94-$95…

      3. i believe my puts spread are totally worthless unless the parties can get into a deal within this 1.5 month… total risk = 2K

      4. the shares can await recovery if $T wins the lawsuit vs DOJ…but i hope we don't come to tat…

        1. I sold some long dated TWX puts, although spread has been terrible with increased volatility. I'm holding but will monitor closely. I feel that TWX standalone value is at least around $80 so hope it won't drop too much further…or actually recovers some. I made a small profit on TWX earlier this year, but went in again and got hit. In all fairness, I feel the latest news caught a lot of arbs by surprise. Just look at that volume today. 

          1. my puts are Jan 18…probably worthless.. if you can hold it, and i believe with Disney's interest in Fox, I agree $TWX is going to worth $80… a lawsuit will take 6 months at least… however, got to be mindful of market conditions and $T's health as well.. i won't want to hold too much stock…probably around my current level is acceptable..

            1. that's why i prefer cash mergers… share/cash mergers are subjected to market conditions and acquirer's stock..i prefer not to hedge the acquirer's stock as it lowers my buying power…

              1. Cash deals are much better, I agree. I also broke my own rule to not attempt to trade the same arb deal multiple times. Should have just moved on after I booked my profits on the first trade and broke even on the second. If TWX/T merger goes to court, it will probably depress stock price for both. Traders don't like uncertainty and long delays. 

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