The Department of Justice is attempting to put the kibosh on Haliburton’s (HAL) $34 billion deal announced in November 2014 to Buy competitor Baker Hughes (BHI) back when crude oil was $75 a barrel. Shares of BHI opened down this morning, below $39, about 4% from its 52 week and 4 year lows, before reversing and trading up 8%:
Why the reversal? Well, the 5% rally in crude oil obviously helped, but it might also have something to do with the face that if the deal does not happen, HAL will owe BHI a break-up fee of $3.5 billion, or about 19% of its current market capitalization.
BHI has been in a sharp downtrend since last summer:
One trader today rolled out a bullish bet, playing for a break above the downtrend at $45. When the stock was $42.40 before noon, 1,000 of the May 42 calls were sold to close at $4.06 and 1,000 of the May 45 calls were bough to open for $2.86. These calls now break-even at $47.86 up nearly 13% from the trading level.
The options premiums look fat, and rightfully so for an option that expires in less than two months. 30 day at the money implied vol is at 80%, and the out of the money calls that were bought in May were at 65%:
Given the uncertainty of the deal and the massive potential change to BHI’s enterprise value, options market makers are not taking any chances for the potential re-rating of the stock.