Time Warner Takeover Win Puts AT&T Options Bulls at Risk

The Justice Department tried to block the massive merger on antitrust concerns

Jun 13, 2018 at 9:23 AM
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After Tuesday's close, a federal judge approved the $85.4 billion buyout of Time Warner (TWX) by AT&T Inc. (NYSE:T) with no conditions, putting to rest the Justice Department's efforts to block the massive merger on antitrust concerns. The deal is expected to be closed next Wednesday, June 20, and the ruling could pave the way for other M&A efforts throughout the telecommunications and media sectors -- including Sprint (S) and T-Mobile (TMUS), as well as the bidding war between Walt Disney (DIS) and Comcast (CMCSA) over Twenty-First Century Fox's (FOX) assets.

Analysts have already started to weigh in on T, too, with Moffett Nathanson downgrading the stock to "sell" from "neutral," and lowering its price target to $28 from $35. The brokerage firm said the merger will "be a negative for [AT&T's] balance sheet," with the combined company carrying "an astounding $249 billion in debt." On the flip side, an analyst at Cowen and Company said this creates "a new investor catalyst including $1.5 billion in anticipated cost synergies."

While TWX shares have climbed 3.9% in electronic trading, T stock is set to open today's session down 4.1%. The shares have been climbing off their mid-May two-year lows near $31, but have recently run out of steam near their 80-day moving average -- closing last night just below this trendline at $34.35. Year-to-date, the shares are down 11.7%.

Nevertheless, options traders have been more bullish than usual in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators bought to open 97,872 calls in the last 10 days, compared to 42,605 puts. The resultant call/put volume ratio of 2.30 ranks in the 93rd annual percentile, meaning the rate of call buying relative to put buying has been accelerated.

Drilling down, the weekly 6/22 33.50- and 37-strike calls have seen two of the biggest increases in open interest over this two-week time frame, and it's possible new positions were purchased at both short-term options. If this is the case, speculators are betting AT&T stock will settle above the strike prices at next Friday's close, when the weekly series expires.

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