Review
What's the story for why we would have an advantage here? Surely quants who specialize in this area are on top of this, and aren't constrained by capital? Unlike previous trades where rationalists made lots of money (Covid short, ETH presale, etc.), this doesn't look like a really weird thing that the pros would be unable to do with sufficient volume.
It's a relatively new situation, that nobody has much experience with. Until recently, the FTC and DOJ only brought lawsuits against proposed mergers that were much more obviously illegal, so nobody specialized in or is experienced with making bets against the government in cases like this.
There was a recent podcast about this.
The bet has been lost. The merge wasn't allowed. https://archive.ph/MDYWF
The share price of Spirit Airlines (NYSE: save) dropped to 50%.
...doesn't that mean that this bet is only favored if you think there's at least a 40% chance of this merger going through? I wouldn't take that bet.
As you know I don't find the EMH consistently true. The argument for why its more than ~40% to go through are linked.
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:
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.
So maybe you're overestimating the upside?
From https://archive.ph/rmZOX:
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.
As far as I can tell buying SAVE is VERY plus EV given the potential merger.
Rough guess is the bet looks like:
+90% on win
-60% on loss (maybe less given P/B of 1.36)
FAVORED to win. Thats a good bet.
Here is a quick primer: https://reddit.com/r/wallstreetbets/comments/18sx0n6/get_saved_with_save/.
More details:
Seeking alpha post - https://archive.ph/SbuXU
Another seeking alpha post - https://archive.ph/rmZOX