Sunday, December 11, 2016
18 years in Wall Street, left after finding out it was all horseshit. Founder/ Master and Commander: iBankCoin, finance news and commentary from the future.
Joined Nov 10, 2007
14,878 Blog Posts

A Tea Party Awaits

With TEA trading down again today, it’s a full buck below an all cash deal by SBUX. An arbitrage trade is to be had here and I might pull the trigger.

If you can get short shares of TEA, it makes sense to get long calls as a pair. A move from $14.5 to $15.5 in the stock will cause short dated call contracts to explode in price– if the deal happens. On the other hand, should SBUX cancel the deal due to a pesticide issue with Teavana’s tea, the brand will be fucking ruined for life. As a result, I expect the shares will plunge into the single digits. Should the deal close, you lose $1 on your short.

My hunch says the deal closes. Schultz isn’t buying TEA for its organic qualities, but branding and distribution. If anyone is capable of firming up quality control, it’s Schultz. If he cancels the deal, TEA is fucked.

UPDATE: Tabbed Blogger contestant, RHINO, just crushed a Pandora short trade. Well done.

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  1. Keith Shepard

    This is an excellent idea. Thanks.

  2. Rhino

    All that matters is the name. I assume he will revamp the entire business. My vote is that it goes through.

  3. Mitten Romney

    How long do you estimate until the deal gets finalized or rejected though?

    • The Fly

      I think we will have clarity within a week. All we need is to be assured that SBUX is firm with their intent.

      If you can’t short stock, buy puts.

      If you bought $5k work of puts and the deal collapsed, you will walk away with $30k.

      There is limited downside for shorts here, but 50% downside for longs.

  4. tm

    There would probably be an IV crush on the options. You could lose on that even if the stock moved up.

  5. Freebie

    I posted this already inside the PPT last week, but the $15 calls are going to 0.5 on a deal and you may be able to scope them up for 0.30 like I did 2 weeks ago.

  6. Josh

    Thanks Fly – you’re practically _giving_ away money by posting ideas like this. No need to buy that xmas present for me now. 🙂

  7. The Earl of Muff

    We need a wealth tax Pres O’B. We need to redistribute coin from those who are banking large amounts to those that are down 15%+ on their 5 figure brokerage accounts. 50% wealth tax on net worth over $1,000,000 ! Ben can fly over middle america dropping 20’s to the masses

  8. MagicAlloy

    Freebie remember the deal is supposed to close by Dec. 31st, so the calls may still be at .4/.45 by Dec OPEX. I am long. I can just picture mgmts response to the question: “what about the 13 data points of non-dupliacted research published by a small short seller from an anonymous overseas lab?” Saying that out loud sounds silly right? I feel like everyone has just scared themselves into thinking the research is legit. Fly, I totally agree with your first instinct which is that the chances of this derailing the deal are tiny. You’re right, Schultz can fix the supply chain for less then the breakup fee of $18M. He’s buying it for retail footprint and brand. 660M is not a huge amt for SBUX.

    • Freebie

      I am talking about the Jan $15 calls, not Dec. Bought them for 0.30 last Thursday when the stock was at 14.2. If they get back down there I will triple down. An easy 66.6% gain from 0.30 to .050.

      • tm

        I assume the .05 is a typo? What do you think your edge is in trading arbs as a retail trader? Think of all the other players who are evaluating the probability of a deal and the info they are privey to…over time this type of trade is a suckers bet

        • MX2101

          My opinion- Fly’s strategy is sound.
          Option players need to mind the bid-ask. I think the 15 calls will be bid .05 to .10 below the stock ask if the deal goes through. Retail will not sell at .50 until 3:59 PM. Maybe never at .50 if everyone is in the funnel

        • MX2101

          More to the point- Freebie, plan on getting .40 when you evaluate this.

        • MagicAlloy

          Actually the deal is supposed to close by December 31st, and I believe there is some sort of penalty for SBUX if it doesn’t. Obviously this is for tax reasons for the Mack clan. So in case the deal does close before Dec. 31st what do the Jan 15 calls go for?

        • mad_scientist

          We will see how freebie’s trade turns out. How will you react if/when he wins big? If all the other players were never wrong, there would be no opportunity to make any money on anything.

        • tm

          It’s not that the other players are never wrong, it’s that your expected return in this trade, over time, is not positive. Especially because realistic trade execution on these particular options, which have a very wide bid/ask as a percentage of their total value, will kill returns. Anyone can win once on a gamble, it doesn’t make it a good system.

        • Freebie

          These are Jan $15 calls are at 0.45/0.50 bid/ask now, the odds of being able to sell at 0.50 before Jan expiration are very good. 0.45 is a guarantee, still at 50% gain.

          The other option is to just exercise them and then sell TEA at 15.5

        • mad_scientist

          I don’t think he was trading it as a system. I think this was a very specific arbitrage play due to the circumstances with this particular company at this particular time. Similar to the way Fly intro’d it in this blog post.

  9. motorcitymadman

    SO when he says folks like he mans African Americans right ?

  10. JTU

    SBUX is having their biennial investor conference tomorrow at 8:00 AM.
    Investors will be listening carefully!

  11. francesco

    MEMS . deal waiting @4$ a share , current price 3.20

  12. SilverthornRoad

    If you consider why SBUX spoke as to the rationale for the transaction, TEA’s management, TEA’s sourcing, and TEA’s locations, the value of each one has gone down if the allegations are true. 100% of samples is difficult to refute as a mistake or mishandled samples. Deals are made everyday but I have yet to find one (especially after the HP/Autonomy disaster) that motivates a buyer to pay up for a controversial name. Best case, SBUX offers a lower price / Worst case, no deal. BTW, termination fee is only $18.4m, small price to pay to avoid legal headaches of pesticide-laiden product . . . and not organic either.