Two Options Strategies for the Pfizer–Wyeth Deal

The Wall Street Journal online edition reports that Pfizer Inc. (PFE 17.45) is close to an agreement to acquire Wyeth (WYE 43.74) for between $65 and $70 billion in a cash and stock deal that would value WYE at about $50 per share. Furthermore, the report said that they have been in talks for months and that a deal may not be agreed upon. With a Historical Volatility of 42 and an Implied Volatility Index Mean (IVXM) of 43.33, here is a Calendar Spread idea using Friday’s closing (mid) prices.

• Buy WYE Jul 42 ½ call WYEGV 4.05 IV 29.01 Delta .5905

• Sell WYE Feb 42 ½ call WYEBV 2.875 IV 48.01 Delta -6084

Debit 1.175 Position net delta -.0179

The debit indicated above is based upon Friday’s middle closing prices between the bid and ask. Considering time decay, the debit Monday should be about 1.275 if the stock price remains unchanged. Use the position net delta shown above to adjust for any stock price change or about .02 for each point change in the stock price.

As an alternative, here is a call ratio backspread suggestion that will benefit not only from a higher stock price but from rising implied volatility that is likely if this deal in not agreed quickly.

• Sell WYE Mar 42 ½ call WYECV 3.20 IV 39.40 Delta -.5928

• Buy 2 WYE Mar 47 ½ calls WYECW .95 each = 1.90 IV .34.16 Delta .2794 each = .5588

Credit 1.30 Position net delta .0340

The credit indicated above is based upon Friday’s middle closing prices between the bid and ask. Considering time decay, the credit Monday should be about the same as the time decay is offset in the spread. Use the position net delta shown above to adjust for any stock price change or about .03 for each point change in the stock price.

As with other call ratio backspreads, the position gains with a rising price and with rising implied volatility. Use a decline in the Implied Volatility Index Mean (IVXM) below 35 or no change in the stock price for 15 days as the SU (stop/unwind).

Disclosure: None