Spirit Airlines: Crafting Value in the Merger Maze (+8%)
When you are 84 and looking for cheap airline tickets.
Executive Summary
Merger denied low fares win? Spirit's survival in the industry's big league.
Strategic trade nets 7.9% ROE: Maneuvering masterfully in merger mayhem.
Recap Situation
The idea was a Christmas present; the reality involved a seasoned judge rejecting a merger between two companies that might have needed each other to compete against the industry’s big boys. Lower ticket costs for another year or two are more important than profitable airlines - and this judge went to Harvard.... maybe that explains it.
We had assigned a probability of 33% to this outcome. We take it with composure and dignity and thank MacroDozer for providing an excellent hedge if the worst-case scenario materializes - you're welcome.
Read the full story below for further details.
Why Now
The story has played out in the short run, and our options expire in 24 days, leaving little room for trade repair in case the price falls below our break-even point again. The implied volatility remains high. If we decide to have another go at it, we will let you know in the Premium Chat, which is the second chat at the bottom in the chat room.
Trade Execution
Trade Entry - Dec 15, 2023
We sold a skewed risk-defined straddle at strikes 15.00, with hedges at 5.00 and 20.00, maturing on Feb 16, 2023. The break-even point was at 8.25.
The options chains were relatively liquid, but the bid and ask spread was wide, so we got filled slightly below mid-price.
Total: 6.75 Credit.
Trade Close - Jan 23, 2024
To close the trade, we are buying back the 15.00 call and put, and selling the hedges at 5.00 and 20.00. We got filled at 6.50, slightly more expensive than mid-price.
Total: 6.50 Debit.
Trade Return
The absolute return on this trade is
6.75 - 6.50 = 0.25
The equity at risk was 3.15, resulting in a return on equity of
0.25 / 3.15 = 7.9%
All MacroDozer articles are purely educational; they are not tailored to any particular individual or portfolio and do not constitute investment advice. Let us know if you are interested in implementing any of our ideas. We can help or point you in the right direction.