Since the election last week there has been a lot of chatter about one of the first order of business for Wall Street, for U.S. multinationals is to repatriate their overseas cash in some sort of tax amnesty. Technology companies like Apple, Alphabet, Cisco and Microsoft have a combined $400 billion offshore. Many believe if that money is repatriated it might be used for domestic acquisitions. I think it is important to remember that this would take months to just get on the agenda, and many more months to implement. But it does make sense to think that in a rising rate environment mega-cap companies would be more inclined to buy growth than borrow and buy back their stock.
Regular readers know that we don’t place a ton of emphasis on unusual options activity, but we use it as input to help weave together some themes. For instance there was a large long dated bullish trade this morning in Pandora (P), the digital music company that has long been rumored to be a take-over candidate, and has even gone so far as putting themselves up for sale. They currently have an activist investor involved who may be pushing for a sale. If Apple, Alphabet, Microsoft etc. were to bring back tens of billions in overseas cash, they might not think twice about dropping $3 to $4 billion on a Pandora to acquire their nearly 80 million strong user base (maybe 8 to 9 million paid) to better compete with one another and Amazon, Spotify and many others.
When Pandora was trading $10.90 a trader sold to open 21,000 Jan 2018 (more than a year from now) 8 Puts at $1.22 ($2.56 million in premium) and bought open 24,000 of the Jan 2018 12/15 call spreads for $1.08 ($2.59 million in premium). As you can see this was done for a small credit, but for the purposes of the explanation, let’s assume for even money. This is what options traders would refer to as a call spread risk reversal. On Jan 2018 expiration, if the stock is between 12 and 15 the trader can make up to 3, with the max gain of 3 above 15 (or $7.2 million in premium). If the stock is between the current price and 8 on Jan expiration the trader would not suffer losses. The worst case scenario is that the stock is 8 or below and the trader would be put 2.1 million shares at 8, down 26% from the trading level, and own any losses below that. Prior to Jan expiration, on a mark to market basis, the trade will gain in value as the stock moves closer to the long call strike, and lose money as the stock moves closer to the short put strike.
The choice of strikes for this trade lines up pretty well with what appear to be some important technical levels. The break-even (yellow line) at $12 is right where the stock gapped down from in late Oct after earnings. The max profit comes at $15, where the stock made a double top in Sept and Oct, and the worst case scenario is where the stock found some support at $8 in Feb and April:
Lastly, despite the call strikes being fairly tight, within the past year’s range, the long dated nature of this trade could clearly be viewed as a take-out trade. Without intimate knowledge of the trade, or the trader’s intent it is impossible to take-away too much, as it might be an overlay for an investor with an existing long position, or possibly stock replacement for a portion or all of an existing position, or maybe a new long. Who knows, but it got us looking again at the story, and that’s enough for us.