Options Betting Suggests Bristol's Proposed Takeover Of Celgene Will Fail

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About: Bristol-Myers Squibb Company (BMY), CELG
by: Mott Capital Management
Summary

Options for Celgene have seen a large number of bearish bets in recent weeks.

Options for Bristol-Myers suggests that the stock remains in its current trading range.

Together both would indicate some are betting that shareholders do not approve a deal.

It may come down to the wire for Bristol-Myers (BMY) to get enough shareholder votes to move ahead with its proposed $74 billion takeover of biotech giant Celgene (CELG). But the deal is no sure thing, with opposition from some of Bristol's largest shareholders. An analysis of the options market suggests that some investors are betting the proposed deal will not get the votes needed to move ahead, with the deal collapsing.

Bristol-Myers is set to hold a shareholder vote on April 12. The options expiration date for April 18 has seen a massive increase in activity over the past few weeks for both Celgene and Bristol. According to data from Trade Alert, the Celgene April 80 puts have seen a significant increase in their open interest levels, while the Bristol April $55 calls and $45 puts have seen a massive jump too.

Bearish Celgene Bets

The Celgene April $80 puts have seen their open interest soar since February 28 to over 77,000 open contracts, up from just 17,000 contracts prior. Additionally, data from Trade Alert shows that the majority of the contracts have traded on the Ask, suggesting that the puts were bought, a bet that Celgene's shares will fall. A buyer of those puts would need the stock to drop to nearly $76.50 to earn a profit. It would be the first indication that the deal with Bristol does not get the votes to move ahead.

Bearish Celgene Chart

Before the deal announcement, Celgene was trading below $67. Should the deal fail, the stock would likely fill a substantial portion of the gap in the chart created from the big acquisition news, dropping to support at roughly $75.

Negatives Signs For Bristol

In yet another negative indication for the deal, this time for Bristol, the open interest levels at the $55 strike price calls for the expiration on April 18 have risen sharply. Since February 25, the number of open contracts has increased to more than 106,000 from around 39,000. Additionally, the data shows that the majority of these trades occurred on the BID side. That would suggest that the calls were sold, a sign that some traders are betting the price of Bristol Myers does not rise over $55.

Additionally, the $45 strike price puts have seen their open interest levels rise to nearly 50,000 open contracts from around 21,000 open contracts on February 27. The data shows that those puts also traded on the BID, which suggests that the puts were sold. It would indicate that traders are betting that Bristol-Myers stays above $45.

Range-Bound

Overall, the two big bets of puts and calls indicate that some traders are betting shares of Bristol stay range-bound between $45 and $55 through options expiration in April.

The chart shows why these trades may be taking place for Bristol-Myers. The stock has been range-bound at $46 and $54 since the middle of October. The chart shows there is an apparent level of technical support around $46, and a level of resistance around $54.

Given the divided shareholder base regarding this deal, a "yes" could send Bristol’s stock sharply lower as some of the substantial and unhappy shareholders begin to dump it. However, the view that the stock stays in its current trading range would indicate that traders are betting a deal doesn't get completed, and nothing significant changes for the company or the stock's outlook.

Lots Of Questions And Uncertainties

However, it is worth noting that the situation regarding the vote is changing rapidly. There have even been reports of hedge funds buying shares of Bristol-Myers to sway the vote in favor of approval. Should the deal get approved, it would help shares of Celgene rise back to the proposed deal price at roughly $102.50 per share.

For now, it would seem there is some evidence to suggest that at least some investors and traders are betting the deal does not happen in the coming weeks. However, it is worth continuing to monitor this very fluid situation.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.