Wiley Hedge – FOXA

by Dan August 20, 2018 2:46 pm • Trade Ideas

A few weeks ago Twenty-First Century Fox (FOXA) and Disney’s (DIS) boards voted in favor of DIS’s $71 billion bid for most of FOXA’s assets, essentially knocking out a higher bid by cable rival Comcast (CMCSA).

During the month of June, shares of FOXA rallied from $40 to $45 as CMCSA initially outbid DIS’s $38 a share offer, and then a week later rallied to $50 as DIS upped their bid.

The stock has since settled into the mid $40s as it has become clear that CMCSA is not coming back, and both companies now wait for regulatory approvals.

There was a trade in the options market today though that leads me to believe that at least one investor is willing to cap potential upside between now and April 2019 to $50 in place of having some protection between $42 and $35 to the downside. When the stock was trading $45.45 at 1 pm today, a trader bought 15,000 of the April 50 / 42-35 put spread collar for 50 cents, or $750,000 in premium.

Here are the legs of the trade, assuming vs 1.5 million shares of stock:

-Selling to open 15,000 April 50 calls at $1.05

-Buying to open 15,000 April 42 puts for $2.55 and

-Selling to open 15,000 April 35 calls at $1

Here is how this trade makes money to the upside (less the premium paid for the hedge), losses to the downside (plus the premium paid for the hedge) and has protection between now and April expiration:

Profits of the stock (assuming against 1.5 million shares) up to $50, profits capped.

Losses of the stock down to $42, but protected down to $35. No protection below $35, but if the stock were below there would have mitigated $6.50 worth of risk, the width of the put spread less the 50 cents premium paid for the hedge.

It appears that this investor used some technical levels to help inform her strikes, $50 as the high, up about 10% as a level to cap gains and help finance the put spread. The $42 put strike that she is now long, less the 50 cents premium paid, so down to $41.50 is the mid-June breakout level on the CMCSA bid, while $35, the level where the investor no longer has protection is a support level the stock bounced off of numerous times in late 2017 and early 2018.