Not So HOT Bull Call Spread in Front of Marriott – Starwood Deal

Domestic and Global M&A activity continues to be incredibly robust. In fact, 2015 is on track to be the best year ever, surpassing 2007, in both the US and worldwide for acquisitions. Much of the deal emphasis has been on technology and healthcare. These groups tend to have a number of conferences and the attendees have to stay somewhere. That leads us to the latest M&A transaction.

Over the weekend, Marriott (MAR) announced their intent to buyout Starwood (HOT) shareholders in a $12.2 billion dollar deal. Starwood signaled their intent to find a suitor earlier this year and while rumors have swirled in the past – they finally consummated a deal.

Perhaps there was some renewed chatter on HOT going into the weekend. We investigated the options tape this morning and noticed paper bought a 1000 lot call spread that printed about 15 minutes before the close on Friday.

Deal Flow

(Source: Dealogic)

The Specifics:

Friday afternoon around 2:45 Chicago time the HOT Nov 75/80 call spread traded 1000 times for 1.61, indicating that paper bought the spread. HOT underlying was selling for $75 at the time of the trade. These options will expire on 11/20/2015 and, hindsight being 20/20, would have made a great deal of sense if Marriott paid a premium for Starwood. If HOT closed @ or above $80 on Friday, the spread would be worth $5.00 v. the $1.61 premium paid. Essentially a 3:1 payout.

HOT Po

However, the terms of the deal, made public this morning price HOT shares around $72 based on the MAR conversion. That same Nov. 75/80 call spread is worth about .30 at the close of Monday’s trading.

Marriott will (assuming the deal closes) expand their brand, particularly overseas, and become the largest hotel chain in the world. In the M&A world, there are (mostly) takeovers, where the company being acquired is purchased at a premium to the market/share value. This is a lesson in the other side of deal-making, the take-under.

 

Post written by Kevin Davitt, CBOE Options Institute