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What the Options Markets Thinks About the Beam Deal

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One way to tell if there is doubt on an M&A deal is to look at the options market. Typically, if there is a chance the deal could go out at a higher price or rejected, we will see it in that market. For instance, in the case of the announced all-cash deal for Beam (BEAM), I would look at the June options to see what the bid on puts looks like to gauge if the market thinks there is a chance the deal could fall apart. Considering you could buy the June 82.5 puts for about $0.50 the answer becomes quite clear. There is little or no chance that this deal falls apart.

Those that are in the M&A arbitrage game MIGHT consider selling the June 82.5 puts at $.50 to collect an annualized yield of about $1.00, but the risk/reward on that is terrible. It also appears unlikely that the cash deal will be higher, because the June 85 calls are trading for $0.25. One trade that MIGHT make sense, considering the deal, would be to sell the June 85 calls at $0.25, but again, the yield isn't really worth it.

One trade that WOULD make sense, if I was holding already holding shares of BEAM, would be to buy the June 82.5 puts for $0.50 and sell the June 85 puts at $0.25. If the deal goes through the investor would have protection on the downside, and it would be paid for if the deal closed. From an actual M&A arb standpoint, there is no money to be made. Congrats to those that got in before the deal.

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At the time of publication, Mark Sebastian held no positions in the stocks or issues mentioned.

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