Merger Uncertainty Attracts Put Traders to Chicago Bridge & Iron

CBI put premiums are spiking, though

Apr 6, 2018 at 2:42 PM
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Chicago Bridge & Iron Company N.V. (NYSE:CBI) stock is trading down 10% at $12.27 amid heavy volume, as questions continue to swirl around the company's planned merger with McDermott International (MDR). Investment firm Hotchkis & Wiley, a large MDR shareholder, recently released a letter stating its opposition to the merger. McDermott responded with a letter of its own, asking shareholders to vote for the merger at a special meeting on May 2. In the meantime, CBI stock is seeing unusual options trading.

So far today more than 6,600 puts have traded -- more than three times the intraday average and far beyond the 1,137 calls that have crossed. Almost half the volume has taken place at the April 10 put, but it's not entirely clear what strategy is being employed here. Coming into today, the put was already home to peak open interest of 17,425 contracts.

Data shows such a preference for puts has been the norm from CBI speculators. The security's Schaeffer's put/call open interest ratio (SOIR) of 2.00 shows put open interest doubles call open interest among options expiring within three months. And digging into the last two weeks in particular, put buying has almost quadrupled call buying at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX).

You'll have to pay up, however, if you want to bet on an extended slide from Chicago Bridge & Iron using put options. That's according to its 30-day implied volatility skew of 30.2%, which ranks in the 88th annual percentile -- telling us puts are pricing in higher-than-normal volatility premiums compared to their call counterparts.

CBI stock has been a massive underperformer in recent years, declining 60% in the past 12 months alone. Today's drop puts the shares on pace for their lowest close since August and a fourth straight weekly loss.

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