Schaeffer's Trading Floor Blog

Lessons Learned From Jos. A. Bank Clothiers Inc (JOSB)

How the JOSB and MW merger talks impacted volatility and options pricing

by 3/12/2014 7:30 AM
Stocks quoted in this article:

"You're going to like how this story ended up, I guarantee it."

Men's Wearhouse and Jos. A. Bank are expected to announce a deal as early as Tuesday that would end months of hostilities between the two retailers, according to people briefed on the matter.

The companies and their advisers worked through the weekend and are closing in on a deal in which Men's Wearhouse would acquire Jos. A. Bank for about $65 a share in cash, these people said. That price would give Jos. A. Bank a market value of about $1.8 billion, and signal the successful completion of Men's Wearhouse's so-called Pac Man defense.

And so ends a saga of bids and counterbids and spurned others like Eddie Bauer.

Jos. A. Bank Clothiers Inc (NASDAQ:JOSB) shot up $2.50 (about 4%) on the news.

If you owned options here, you're possibly disappointed. The volatility was pretty high on anticipation of some sort of resolution.

Jos. A. Bank Clothiers Schaeffer's Volatility Index since March 2013

And in March, it was all concentrated near the money.

Jos. A. Bank Clothiers March 2014 Open Interest Configuration

So in all likelihood, this resolution is a bit of a disappointment, albeit at the end of a nice run. No private equity or foreign retailer or some unknown ended up swooping in and taking it even higher.

On the positive side, at least they settled, and the deal didn't completely blow up.

Takeover names are very tricky animals in options world. Setting aside the fact that "smart" money usually gets in before the stories go public, its tough to know how to value time and volatility. In cash deals, time has zero value. There's some sort of tender date that serves as the de-facto expiration for the entire board. In straight mergers, time value works similarly to a normal stock. But volatility can get tricky. It's partially priced based on the probability of the deal actually consummating. That is, it can get pumped while there's uncertainty, and then it can abruptly collapse once the deal completes.

Volatility will also partially price based on the implied volatility of the acquirer. That's because in the merger, holders are all left with options on the buyer.

Another factor is that arbs play the names when the deals are pending, but get out once its basically finalized. And they can get a tad jumpy (to say the least) when uncertainty reigns. As dangerous as it sounds, it's usually right to follow their lead, as they are after a risk-adjusted return that's usually pretty good.

The best idea, though, is to be extremely careful. Use spreads, as price and/or volatility can go crazy literally overnight.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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