Bullish Play in Signet Options as Jeweler Acquires Zale Corp.

One investor was quick to respond to news of what is speculated to be a highly accretive deal for Signet Jewelers Ltd. (Ticker: SIG) using July expiration options in the acquirer. Shares in Signet, which first breached $80.00 last month, have shot up 17% to $92.76 today after the company announced it will buy Zale Corp. (Ticker: ZLC) in a deal valued at $1.4 billion. Typically, shares in the buyer suffer as it pays out for the target and then faces the hurdle of assimilation. In this case, according to a press release issued by the companies, the deal could generate approximately $100mm in annual synergies within three fiscal years, lifting shares in both the acquirer and target.

An option investor took to Signet contracts this morning and sold 1,000 of the July expiry puts with a strike price of 80.0 at $2.00 apiece and used the proceeds to buy July expiry call options with a strike of 110.00. The trade cost the princely sum of zero, with the buyer implicitly indicating a willingness to have a bundle more shares in Signet put to him at July expiration now that it owns the 1600 retail locations in the recently turned-around Zale Corp., whose management offered investors a pleasant surprise with sales improvement last year. And for zero outlay the investor is now exposed to further upside for Signet should investors continue to discount potential future brand acquisitions.???? ?

Chart? – What options are saying about Signet

The Probability Distribution for shares in Signet continues to display even risk of both upside and downside movement by July?s options expiration. We have drawn two vertical lines on the plot to denote the cumulative likelihood that shares in Signet will close by then below $80.00 and above $100.00. Even as options premiums assimilate news of the deal, the implied chance of a sub-$80.00 close by July is 22.76% in spite of the jubilation surrounding the accretive deal. Meanwhile the chance of Signet landing anywhere above $100.00 per share by July is currently thought to be 31.65%.

According to an article in the WSJ, Signet and Zale have been in talks for several months. Today?s options activity suggests that this investor is willing to bank on the rising chance that Signet bulls will assign further optimism to more deals in the pipeline.??



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