A quick housekeeping note- there likely won’t be any posts for the rest of the week as I’ve got a few things on my plate. Sorry!
But I did just want to post a quick write up on a very speculative idea, mainly because Saturday’s (admittedly hillarious) post on potential fraud was so well recieved. The idea is simple- go long the Focus media (FMCN) put options.
I’ve actually had this trade on in a very small way since the middle of August. I’m long the April $19 options with an average price ~$1.20. It’s a very, very small piece of my portfolio (maybe 25 basis points), but I think the risk reward is just to outstanding to ignore, particularly in an IRA account where any taxes on the potential huge windfall if the options work out would be shielded.
Anyone who follows value blogs has likely heard of Focus Media- it’s been written up ad nauseam over at bronte capital. The thesis is actually pretty simple- Focus is the subject of a takeover offer, but the offer has no firm financing and is not binding. Focus’s accounts look incredible and are probably fraudulent If they are, and the PE buyers do any due diligence, they will pull out and the stock will collapse. If the accounts aren’t fraudulent, the PE buyers will complete the deal.
What makes the put options so outstanding is the incredible risk reward. If the deal is going to fall through, it’s going to happen before the third week of April. If it does fall through, the stock is going to collapse, likely to the low single digits- for our purposes, let’s say $5 (but it’ll likely be lower, since a fraud is likely to have had all the assets stolen). If it doesn’t fall through, you lose the option you paid for the puts.
Thus, if you buy the puts for $1.10 (today’s price for the $19 strikes), you’re risking $1.10 to make $14 in the event it’s a fraud ($12.90 profit plus the $1.1 back). If the deal doesn’t fall through, the option expires worthless.
Doing some quick math, we find that the market is currently only placing an 8% chance of this deal falling through. That seems insane for a deal in an emerging market with no firm financing commitment, no break up fee, and a high probability of fraud… especially when you consider one of the buyers is rumored to have already pulled out.
I think the options also serve a bit as disaster insurance- if the world economy goes off a cliff, the PE investors are going to back away from this deal in a split second and the stock will collapse. Not that I think any of that’s likely, but it is an added bonus.
So I’m long a small bit. It’s risky, and if I’m wrong it really won’t affect my portfolio…. so please be careful if you’re considering a similar trade!
Disclosure- Long FMCN puts
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