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Merger Arbitrage with Monsanto (MON) and General Electric Put (GE)

Opening a merger arbitrage play.

music selection:  “A Stroke Of Luck” — Garbage

weigh-in:  211.4 (0.6)

I purchased Monsanto (MON) today at 114.60.  The company is attractive in its own right.  It gushes free cash flow and has a dominate market position in its segment.  Bayer has made a buyout offer of 128 dollars a share – Cash.  That is an 11.69% premium over my purchase price if the deal goes through.  It will probably take some months for the deal to go through but I expect to do well with with very low risk.  If the deal doesn’t go through, I own a great business yielding 1.88%, is optionable, and MON will collect a 2 billion dollar breakup fee if the deal fails.  That two billion is an important kicker as it would like MON with a fortress of a balance sheet.  As the spread between the offer price and spot price narrows, it may become worthwhile to juice returns with covered calls written at the 128 strike.  Right now there is no liquidity at that strike.

I also sold puts on General Electric (GE).  My previous puts expired out of the money on Friday.  I’ve gone 50 cents in the money again as I’m eager to get assigned.  I sold GE170413P00030500 for 74 cents a share.  The trade will be in force for 39 days.  It yields 22.71% annualized and enjoys 2.43% downside protection from a downward move in the stock price.  GE remains attractive due to restructuring that has greater lowered risk in the financial division and the development of the Predix operating system that promises to do for GE what iOS did for Apple. If assigned, I will begin writing covered calls 10% out of the money to collect some income while I wait on price appreciation.

Devour your prey raptors!

{ 7 comments… add one }
  • financialfreedomsloth March 7, 2017, 9:00 am

    Have been thinking about arbitrage on the Monsanto deal ever since Berkshire Hathaway did the same! They are rarely wrong and my arbitrage on SAB Miller last year worked out great!

    • The Lizard King March 7, 2017, 3:53 pm

      The beauty of this one is the “downside” is owning MON at a terrific price!

      • financialfreedomsloth March 7, 2017, 6:29 pm

        Got them at 115 USD. Do you use any leverage for plays like this? I used CfD’s so will have a finance fee of around 3.1% on a yearly basis but the upside is that I could go in for around 100.000 USD. Even if the merger takes 1 year to complete (and i am guess it will be more 6 to 9 months) I will still make a net 7% profit.

        • The Lizard King March 7, 2017, 11:22 pm

          No leverage for me. I try to limit my loan to what I take from short positions.

  • RocDoc April 27, 2017, 2:27 am

    Thanks for the heads up on the possible Bayer buyout of Monsanto. I’ve been a buy and holder for the most part and have owned Monsanto for years. I’m enjoying “arm chair” options investing with you but I think I’m going to wait until I FIRE in a few years to do it with real money. It is going to take me some time to know and fully understand what you are doing. It seems pretty efficient once an investor knows the techniques.

    • The Lizard King April 27, 2017, 2:42 am

      You are welcome. MON is a strong player even if the merger fails. Best of luck once you try options for real.

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