Name That Trade – $CBS: Two and a Half Verdicts

by Enis June 24, 2014 2:25 pm • Commentary

I wrote a detailed Name That Trade post on the pros and cons of CBS in May.  Since then, the story surrounding the stock has gotten much more interesting, but here was the conclusion from that post for good measure:

At this juncture, while CBS looks cheap on paper based on continued share buybacks, the overall business outlook hardly looks too rosy.  When the fundamental case for a stock rests on financial engineering rather than business performance, we generally prefer to stay away.  However, given the large share buyback, if implied volatility spikes at some point in 2014, we might look at options structures that sell volatility, since the company will be in the market supporting the stock.


No interest in buying the stock, but might look at short volatility options structures if CBS vol spikes, especially on a selloff.

So what has changed since May?  Well, CBS (along with several other media companies) has been embroiled in a legal court case against Aereo since 2012.  Here’s Wikipedia:

Aereo is a technology company based in New York City[1] that allows subscribers to view live and time-shiftedstreams of over-the-air television on Internet-connected devices.[2] The service was launched in February 2012,[3] and is backed by Barry Diller’s IAC.[4]

Aereo’s legality is currently the subject of an ongoing legal dispute with the owners of several broadcast television networks. The point of contention is whether Aereo’s business model constitutes a public performance, which would legally require it to obtain retransmission consent from the content providers. The case is currently before the U.S. Supreme Court.

Implied volatility in CBS options has moved to the highest level in the past 2 years after the Supreme Court announced that the verdict of the case would be released at the end of June:  

[caption id="attachment_42113" align="alignnone" width="600"]30 day implied volatility in CBS, Courtesy of Bloomberg 30 day implied volatility in CBS, Courtesy of Bloomberg[/caption]

Options markets are very wide, but they have priced in a move of around 5-7% for the event based on current spreads.

Fundamental analysts have generally been sanguine about the outcome of this case, noting that CBS can always pursue a change in strategy (such as going straight to cable) if the Court rules in favor of Aereo.  Nonetheless, most analysts expect the Court to rule in favor of the media companies given the broader implications for content providers across the media spectrum.

CBS still looks to be rangebound from a technical perspective:

[caption id="attachment_42115" align="alignnone" width="600"]CBS daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg CBS daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg[/caption]

Both the 50 day ma and the 200 day ma have flattened out around $59-$60, and the stock is right around there as well.  $55 is major support on the downside, while $68.10 is the all-time high from March.

With the event pumping implied volatility, this looks like a good opportunity to sell volatility on CBS.  Our personal view is that the Court rules in favor of the media companies, so we have a slight bullish bias along with a short volatility view.  I bid 1.35 in the market over the past couple hours, but the order was not filled, and bid/ask is very wide in the options, so we might revisit this trade in the future with a limit order once again:


Hypothetical Trade: CBS ($59.40) Buy Jul19th 57.5/62.5/67.5 Call Butterfly for $1.35

-Buy 1 Jul19th 57.5 Call for $3.50

-Sell 2 Jul19th 62.5 Calls at $1.30 each ($2.60 total)

-Buy 1 Jul19th 67.5 Call for $0.45

Break-Even on Jul19th Expiration:

Profits: btwn 58.85 and 66.15 make up to 3.65 with max gain of 3.65 at 62.50

Losses: btwn 57.50 & 58.85 lose up to 1.35, btwn 66.15 & 67.50 lose up to 1.35, below 57.50 and above 67.50, lose full 1.35.

Rationale:  This trade structure offers a long bias without the negative vol crush that will occur if one were simply long calls or call spreads.  Options markets are very wide, so nothing done for the moment.