Hello Investors,
Today we discussed merger arbitrage and how to trade it. Our preferred method is through options, as they can create a compelling blend of risk, reward, and probability.
We initiated a very small stock position in OGN following the merger announcement, in which Sun Pharmaceutical Industries agreed to acquire Organon in a deal valued at approximately $11.75 billion, including debt. Under the terms of the agreement, Organon shareholders are expected to receive $14.00/share in cash, subject to customary closing conditions and regulatory approvals.
We also discussed how to calculate the market’s implied probability of a deal closing based on the spread. A simple framework is dividing the downside risk by the total of downside risk plus upside reward. This can help determine whether the current spread is offering favorable odds relative to your own assessment of the transaction.
We are also attempting to buy calls and call spreads if we can get favorable fills, as we believe options may offer an attractive way to participate in the opportunity while defining risk. The details are as follows:
Bought 100 shares of OGN at 13.19/share – this order has filled
Trying to sell a covered call against as follows:
Sell to open: OGN Jan 21st (monthly) 2028 – 15.00 strike call
Credit: 0.20
Attempting to buy long calls as follows:
Buy to open: OGN Jan 15th (monthly) 2027 – 12.50 strike calls
Debit: 1.15
Attempting to buy call spreads as follows:
Buy to open: OGN Jan 15th (monthly) 2027 – 12.50 strike calls
Sell to open: OGN Jan 15th (monthly) 2027 – 14.00 strike calls
Debit: 1.00
Max risk = 1.00 or $100.00 per spread
Max reward = 0.50 or $50.00 per spread
Have a great week!