MorningWord 9/24/13: Options Traders Can Blame Canada – $BBRY

by Dan September 24, 2013 9:08 am • Commentary


MorningWord 9/24/13:  Avoiding a take under for a distressed company is kind of tricky business.  IN the case of BBRY, everything that could have gone wrong in the last few years has, these guys haven’t been able to “buy a bucket” since 2007.  Yesterday’s announcement by BBRY’s board that the company has agreed to be taken private for $9 a share by its largest shareholder Fairfax Financial.  What’s interesting about the timing of the announcement is that it comes one trading day after the late Friday disclosure that the company was substantially reducing its workforce by 4500 jobs and saw a revenue miss in the current quarter by almost half of what Wall Street analysts had expected ($1.6 b vs $3.03b expected).

For all intents and purposes, the timing of the last 2 major events don’t seem to be a coincidence, I think it is safe to assume that Fairfax was the only bidder for the company and the offer they made was a sort of take it or leave it at $9.  BBRY’s board faced with the embarrassment of accepting a “take under” decided to get the bad news out of the way Friday afternoon which caused the stock to plunge below the $9 a share bid.  Shockingly, when the bid came out on Monday it was at a slight premium to where the stock was trading.  Talk about the “art of the deal”!

Obviously that is all speculation and really doesn’t matter a whole heck of a lot to most investors, except for the fact that the Friday/Monday combo of events played havoc on options traders in the stock.   The chart below shows the  30 day at the money implied volatility in BBRY options.  The white circle on Friday shows the IV spike on the news of revenue miss, write down and job cuts (up more than 10 points from the spot prior to the stocks halt) and then the red circle yesterday showing the dramatic drop of almost 60 points on the news of the go private deal.

BBRY 2 day IV from Bloomberg

That type of implied volatility drop is an indication that most traders view a deal around the Fairfax offer price as the most likely scenario going forward.  The Jan14 9 straddle closed around 1.20, which only implies about 15% of movement in either direction between now and January 17th, 2014.  For a stock like BBRY, that would normally be nothing, but it’s just more confirmation that few traders expect either a higher bid or this bid to fall through.  The market’s viewing it as close to a done deal.

After years and years of disappointment, investors might be close to saying good riddance as well.  While it’s a low ball offer considering where the stock was just a few months ago, there are no large, concentrated holders of the stock outside of Fairfax.  Unless a white knight unexpectedly comes on to the scene, this BBRY deal is likely as good as it gets.


Disclosure: we are short a Jan14 12/10 Put Spread and Long Jan14 16/19 Call Spread (here) that was initiated in late June as a speculative way to play for a high teens take out.  With the stock below both of our Put strikes, and given our analysis above, this position is very likely to remain a max loser, but there is no reason to take it off at this point, as we can not lose more than we risked, which was the width of the short Put Spread.  This was a defined risk speculative play that ultimately went straight to the worst case scenario.