Unless I’m misreading, it looks like there’s a bunch of volume+interest in put options with strike prices of around $5, but little volume+interest in options with lower strike prices (some in $2.50, but much less). $5.5 for January 5th, $5 for January 19th, $5 for February 16th. Much more volume+interest for put options in general for Feb 16th. So if we take those seriously and I’m not misunderstanding, the market expects a chance it’ll drop below $5 per share, so a drop of at least ~70%.
There’s more volume+interest in put options with strike prices of $7.50 and even more for $10 for February 16th.
There’s also a decent amount of call option volume+interest at strike prices of $17.5, $20, $22.5, $25, (same links as the comment I’m replying to) which suggests to me that the market is expecting lower upside on successful merger than you. The current price is about $15.8/share, so $17.5 is only +10% and $25 is only +58%.
There’s also of course volume+interest for call option at higher strike prices, $27.5, $30, $32.5.
I think this also suggests the market-implied odds calculations giving ~40% to successful merger are wrong, because the expected upside is overestimated. The market-implied odds are higher.
Author’s analysis—assumed break price of $5 for Hawaiian and $6 for Spirit.
also:
Without a merger, Spirit may be financially distressed based on recent operating results. There’s some risk that Spirit can’t continue as a going concern without a merger.
Even if JetBlue prevails in court, there is some risk that the deal is recut as the offer was made in a much more favorable environment for airlines, though clauses in the merger agreement may prevent this.
In my opinion, Spirit Airlines, Inc. equity is undervalued at around $15, but you’re signing up for tremendous volatility over the coming months. The equity can get trashed under $5 or you can get the entire upside.
Why is the downside only −60%?
Good book value. It might trade under book but its presumably not going to zero when it has decent book value.
Unless I’m misreading, it looks like there’s a bunch of volume+interest in put options with strike prices of around $5, but little volume+interest in options with lower strike prices (some in $2.50, but much less). $5.5 for January 5th, $5 for January 19th, $5 for February 16th. Much more volume+interest for put options in general for Feb 16th. So if we take those seriously and I’m not misunderstanding, the market expects a chance it’ll drop below $5 per share, so a drop of at least ~70%.
There’s more volume+interest in put options with strike prices of $7.50 and even more for $10 for February 16th.
There’s also a decent amount of call option volume+interest at strike prices of $17.5, $20, $22.5, $25, (same links as the comment I’m replying to) which suggests to me that the market is expecting lower upside on successful merger than you. The current price is about $15.8/share, so $17.5 is only +10% and $25 is only +58%.
There’s also of course volume+interest for call option at higher strike prices, $27.5, $30, $32.5.
I think this also suggests the market-implied odds calculations giving ~40% to successful merger are wrong, because the expected upside is overestimated. The market-implied odds are higher.
From https://archive.ph/SbuXU, for calculating the market-implied odds:
also:
So maybe you’re overestimating the upside?
From https://archive.ph/rmZOX: