Did Time Warner overplay its hand?

Murdoch taking money and going home

Time Warner options

Ouch! News that Rupert Murdoch’s 21st Century Fox has abandoned its bid to buy Time Warner(NYSE:TWX) is not what event-driven call buyers wanted to hear having locked-in to bullish bets back on July 16th when headlines hit the screens. On that day shares in the company jumped from $71.31 to $87.00, while volumes surged on call options expiring August 15.

As of Tuesday’s close, open interest data showed investors had positions in more than 40,000 call options at three strike prices: 80.0, 85.0 and 90.0. So far on Wednesday there has been no notable action at those same strikes, indicating traders are staying put for now with out-of-the-money contracts where time-value is fast eroding option value. Premiums, however, have slumped massively as shares shed 10.8% to stand at $76.00. As news of the proposed deal emerged in July investors paid an average premium of $4.87 to secure rights to buy shares in TWX at $80.0 while they paid an average of $2.11 to buy 20,800 calls at the 85.0 strike. Today those same premiums plunged to 30-cents and four-cents, respectively. Overall option volume on TWX is just 25,000 contracts on Wednesday. 

Chart – Call option open interest jumped July 16th as bid news emerged


About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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