Friday, February 22nd 2019
CELG buyout by BMY: What did the options market know?
The Celgene's buyout by BMY was unexpected. So much so that even the implied volatility forecasts missed it. Here's what story the data told us.
The buyout of Celgene by Bristol-Myers Squibb at a 54% premium was unexpected and there was little foreknowledge of the deal in the options market, according to ORATS implied volatility data. If there was leakage, we would likely see a drop in longer-term IVs, but this did not occur. The deal appears to have a high degree of certainty as short-term IVs fell along with long-term options.
Celgene (CELG) is to be bought by Bristol-Myers Squibb (BMY) at a 54% premium to the closing price yesterday. Under the proposed deal, CELG holders would receive one Bristol-Myers share and $50 in cash for each Celgene holding, as well as a special rights issue that will pay off if the merged group meets certain business targets according to TheStreet.com.
What did the options market know prior to the announcement? Not much. According to ORATS implied volatility data which can show if there was movement before the deal, "there was little foreknowledge of the deal", according to Matt Amberson, Principal at ORATS talking to reporters.
I do not see any obvious leakage in the options market for CELG. If there was a major leak, the IV at 180 days would have moved lower faster.
As the 180 day IV stood yesterday at 38%, it was down from the highs from 12/24 of 45% but above the trending volatility from the rest of December that averaged about 35%. Currently, the constant volatility or interpolated 180 day IV is 24%.
If there was leakage, we would likely see a drop in longer-term IVs, because the maximum duration of all options become the finalization of the buyout. This appears as a large fall in implied volatility especially in the longer dated options.
Near-term options IV are dependent on the certainty of the deal. This deal looks to have a high degree of certainty because the short-term IVs fell along with the long-term options as you can see in the graph.
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