Stock familiar with takeover game
05/18/18

It may not be the Go-Go ‘80s, but a few big potential mergers and acquisitions (Time Warner-AT&T, Disney-Fox/Comcast-Fox) as well as recent blockbuster deals (Walmart-Flipkart) may have reminded some traders of the big moves that can occur in takeover targets, real or rumored.

Remember all the action in Qualcomm (QCOM) before Broadcom’s (AVGO) bid to scoop it up went up in smoke? When you have a minute, check out a QCOM chart spanning the past year and see if you can figure out when news broke of the proposed deal, and when the plug was pulled.

Although most deals don’t have the star power of the Broadcom-Qualcomm pairing, many stocks rumored to be on another company’s shopping list can get at least a temporary boost. It’s impossible to know whether news of Worldpay’s (WP) potential “buy-ability” contributed to its modest upturn off its May 11 low of $80.26, but the electronic payment processing company has gotten some recent press about its potential attractiveness to corporate suitors, particularly JPMorgan, which had reportedly looked into the company in the past.1

Worldpay (WP), 5/31/17 – 5/17/18. Worldpay price chart. Range near highs.

Source: OptionsHouse

Interestingly enough, Worldpay has already been acquired once in the past 12 months, by US credit card processing company Vantiv in a $10 billion deal announced last year2 —first reported in early July and confirmed in early August, which corresponds to a couple of conspicuous moves on the daily chart (above).

Regardless of takeover talk, though, there may be good reason WP is hanging around in the neighborhood of its March high above $85. On May 10 the company put out its first quarterly numbers since the Vantiv deal was finalized, and beat both earnings and revenue headline numbers. The stock turned lower after the release, though, ultimately forming the May 11 swing low that occurred near the bottom of the stock’s recent trading range. Is the stock set to make another swing toward the top of the range, or beyond it?

Price targets aside, bullish traders interested in WP may be looking at options as an alternative to buying stock, as WP options implied volatility (IV) declined more than 30% from the prior week, as the following LiveAction scan showed:

Worldpay (WP) options volatility decrease, 5/17/18. WP options implied volatility (IV)

Source: OptionsHouse

Lower IV translates into lower option prices, all else being equal, so traders may look to buy relatively underpriced call options to take advantage of potential upside while also limiting downside risk (to the cost of the options, which would expire worthless if the underlying stock was below the strike price).

For instance, a bullish trader could buy calls outright, or buy roughly at-the-money calls while also selling out-of-the-money calls to offset the cost of the long call and offer protection in the event the stock turns lower (a “vertical” spread or “bull call” spread). The following chart shows the risk/reward profile of being long June 80 WP calls and short June 85 WP calls with the stock trading around $82:

WP options spread profit/loss profile. Vertical options spread. Bull call spread. Debit spread.

Source: OptionsHouse

The position’s downside is limited to the cost of the spread (around $1,350), which would occur if the stock is below the lower strike price at expiration. Similarly, the spread’s upside is capped at the higher strike price. 

Different strokes for different traders, depending on how the story pans out. 

Market Movers Update: The Russell 2000 (RUT) followed up on Wednesday’s breakout and new all-time high with more relative strength yesterday, closing up on the day while most of the market closed in the red.

Gaming tech company Scientific Games (SGMS) hasn’t backed off much from the spike high (+16%) it made on Monday after the Supreme Court’s decision legalizing sports betting.

The energy space has remained…energetic: Yesterday Brent crude oil (European) hit $80/barrel for the first time since 2014, while WTI crude oil (US) topped $72 before pulling back. SolarEdge Technologies (SEDG) pulled back moderately from the high it made last week after rocketing 27% in three days.

 

Click here to log on to your account or learn more about E*TRADE's trading platforms, or follow the Company on Twitter, @ETRADE, for useful trading and investing insights.


1 Cincinnati Business Courier. Worldpay could be acquisition target, analyst says. 5/14/18.

2 Reuters. U.S. payments firm Vantiv clinches $10 billion deal to buy Worldpay. 8/9/17.