Big Printin’ – $MON Santa

by Dan May 24, 2016 3:56 pm • Commentary

Earlier today, Monsanto (MON) turned down Bayer of Germany’s $62 billion takeover bid, citing the following:


With MON sporting a nearly $48 billion market cap, and $55 billion enterprise value, some investors may see today’s move as merely posturing. MON is up about 3% on the day as traders do not see this as the end of the 20% rally since May 1oth when rumors of a bid first emerged.

Options volumes ran hot today, with total volume about 3x average daily while calls outnumbered puts 3 to 1.  There was a bullish trade that caught my eye when the stock was trading $109, when a trader sold to open 5,000 Oct 92.50 puts $2.39, and bought 5,000 of the Oct 110 / 125 call spreads for $5.59, resulting in a debit of the trade structure of $3.20, or $1.6 million in premium.

This trade breaks-even on the upside on Oct expiration at $113.20, offering gains of up to $11.80 up to $125, with the max profit above those levels.

Between $113.20 and $110 the trader would lose up to the $3.20 in premium, loss of the full premium below $110 and the worst case scenario that the trader would be put 500,000 shares at $92.50, down 15%, but effectively $95.70 (the put strike plus the premium spent for the trade).

There are a few reasons this trade structure might have been used to express a bullish view. First, there is no way to tell when the timing of another bid may come, so the trader wanted to buy some time. Second, selling the $125 strike call would place a value of the bid at $125 or higher above the previous bid and also be back at the 2015 highs, while the level the trader would be put the stock on the downside is back to the gap level from earlier in the month:

MON since Jan 2015 from Bloomberg
MON since Jan 2015 from Bloomberg

Lastly, all the rumor, speculation, confirmation and refusal of bid has caused options prices to soar. This trade structure looks to mitigate decay of options prices in the event that the stock settles in and nothing happens for some time. Selling out of the money calls and puts helps achieve this task of offsetting near the money decay of the Oct 110 calls: