Bears Bundle Bets on DirecTV as AT&T Waits for Deal OK: Options

While AT&T Inc.’s $95-a-share bid to purchase DirecTV puts a lid on prices of contracts to buy the stock, options traders are willing to dish out more for protection in case the deal falls apart.

Contracts to sell DirecTV shares are the most expensive ever relative to bullish wagers, according to data on three-month options compiled by Bloomberg going back to 2004. The company’s stock has surged 23 percent in 2014.

The takeover must clear a government antitrust review and DirecTV’s successful renewal of rights to the National Football League’s Sunday Ticket package, a $4 billion smorgasbord of American pigskin that is one of the satellite television operator’s most-important assets.

"A lot of people are spending money to hedge against the downside," Stephen Fauer, a fund manager who helps oversee $100 million including DirecTV stock at Syracuse, New York-based Pinnacle Capital Management, said in a June 17 phone interview. "I’d like to use options to protect our position, but they’re just not priced very favorably."

Puts betting on a 10 percent drop in DirecTV shares cost

11.08 points more than calls betting on a similar-sized gain, three-month contracts show. Over the past three years, the calls have been an average of 5.10 cheaper than puts, data compiled by Bloomberg show.

Options Trading

Implied volatility, the key measure of options prices, for both sank to the lowest on record after the takeover bid was announced in May. Since then, implied volatility for puts has jumped 65 percent to 22.62 and fallen 11 percent to 11.53 for calls. The three most-traded contracts on DirecTV are puts to sell the shares at $82.50, $80 and $77.50. The stock decreased

0.1 percent to $84.54 at the close in New York.

On June 16, a trader bought 6,000 DirecTV puts expiring in December at a strike price of $75, Alison Edwards, an analyst at Susquehanna International Group LLP, wrote in a note to clients. The company’s shares gained less than 0.1 percent to $83.13 that day amid the bet on a 10 percent decline.

"Near-term uncertainty is causing options traders to take these short-term bearish bets," Sachin Shah, a special situations and merger-arbitrage strategist at New York-based Albert Fried & Co., said in a June 16 phone interview. "People are positioning themselves like this because a resolution is still so far off. They’re looking for an excuse to sell."

FCC Decisions

Darris Gringeri, a spokesman for El Segundo, California-based DirecTV, declined to comment on the company’s options.

The Federal Communications Commission will review the $48.5 billion deal announced May 18 that would give AT&T more than 38 million satellite-TV customers in the U.S. and Latin America. Through its acquisition of DirecTV, AT&T is bulking up as Philadelphia-based Comcast Corp. and Time Warner Cable Inc., the two largest U.S. cable companies, also await FCC and antitrust approval for their proposed combination, announced in February.

The purchase of DirecTV would give AT&T, the second-biggest U.S. mobile-phone carrier, a national satellite-TV provider to combine with its existing packages of wireless, phone and high-speed Internet service. It would also eliminate competition between DirecTV and AT&T’s U-verse landline video service, which previously served as an alternative.

Time Warner’s purchase of DirecTV still has a 90 percent chance of being approved in mid-2015, James Ratcliffe, an analyst at Buckingham Research Group, wrote in a June 18 client note.

‘Capped’ Upside

The ruling will likely be considered in tandem with the merger between Comcast and Time Warner, which could delay the approval process even further, according to Shah. The options market is short-term oriented, so it is unappealing to make long bets on a stock involved in a deal that may not be approved until the middle of next year, he said.

DirecTV shares are "very likely" to trade at a discount to the $95 offer price until the acquisition is approved, according to Amy Yong of Macquarie Group Ltd.

Highlighting the caution some investors have around the deal, DirecTV’s stock is currently trading 12 percent below the proposed acquisition price, the 13th-largest gap out of 103 pending acquisitions tracked by Bloomberg.

"There’s a deal waiting, so the upside is pretty much capped," Yong, a New York-based analyst, said in a June 16 phone interview. "You know you’re getting $95. It won’t trade through that."

Call Volatility

The $95 cash-and-stock offer has led to abnormally low volatility on calls betting the company’s shares will rise, according to Gary Wishnow of Rosenblatt Securities Inc. The ratio of 25-delta implied volatility for DirecTV calls compared with puts fell to 0.78 on June 13, the lowest since Jan. 7, according to data compiled by Bloomberg. Options with 25 delta move about 25 cents when the underlying stock moves $1.

Some investors are betting that rather than decrease, DirecTV’s share price will stay largely unchanged, according to Wishnow. When the AT&T acquisition was announced, an options trader sold an at-the-money straddle expiring in June, showing no expectations that the stock would move in either direction, he said. A straddle is an options strategy through which an investor holds a position in both a call and put with the same strike price and expiration date.

Still Bullish

"The skew is so high because the volatility on calls is low," Wishnow, head of derivatives sales and trading at Rosenblatt, said in a June 17 phone interview. "People are still bullish in the name. I’m not really seeing bearish activity here."

DirecTV will pay AT&T a breakup fee of $1.445 billion if it agrees to be sold to another company, the pay-TV provider said in a May 19 filing. AT&T won’t owe a breakup fee to DirecTV if the deal is blocked by regulators on antitrust grounds, according to phone interviews with AT&T Chief Executive Officer Randall Stephenson and his DirecTV counterpart, Mike White.

In addition to the regulatory approval process, the DirecTV acquisition hinges on the company’s ability to renew its deal for the NFL Sunday Ticket.

White said on May 19 that DirecTV has been in talks with the NFL. If the Sunday Ticket rights aren’t renewed on the terms discussed between AT&T and DirecTV, then AT&T can call off the merger, the filing said.

"There are certain conditions under which AT&T can walk away without a breakup fee, and that puts some risk in there," Fauer said. "It’s not the likely outcome, but it’s not unimaginable."

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