Microsoft's Call to Duty—Extending the Activision Acquisition Contract
Jul 21, 2023
On July 11, 2023, Activision Blizzard (ATVI) shareholders rejoiced as Judge Jacqueline Scott Corley ruled against the Federal Trade Commission's attempt to halt or terminate the Microsoft (MSFT) acquisition of ATVI. That left the tech giant free to acquire the company for around a cool $68.7 billion in cash. ATVI stock spiked from $82.56 to $92.91 intraday.
While the deal is said to be all but done, the two companies decided to extend their deadline a few months to clear regulatory hurdles and ensure every little detail is accounted for. This hasn't affected ATVI stock much at all, as the company still flutters between $90 and $95. The acquisition cost of $68.7 billion would put the share price right around $95.
What I love about the options market is that we can get a lot of information just by looking at extrinsic value and implied volatility numbers in each expiration cycle. For example, if a company has an estimated earnings announcement in August 2023, we can just look at the stock's weekly option expiration cycles to see where there is a spike in implied volatility and options premium. That's where the market is pricing the earnings announcement to be, even if it's not completely official.
With pending stock price acquisitions, we know there is a projected sale price. The stock can move toward that projected sale price and flutter around there as the deal gets worked on, but we can check out long-term expiration cycles to see if the market really thinks the deal will go through.
If the market agrees the deal will surely go through, long-term options contracts that typically would have a ton of extrinsic value may be worthless. If the market thinks there is a chance the deal would fall through, these long-term contracts would still reflect a good amount of extrinsic value in the option premiums.
Looking at ATVI, it appears the market does in fact agree that the deal will go through, and right around the $95 price point. The $92.5 strike is still trading for a decent value, but there is a huge drop in the price of the $95 strike, which implies a low probability event that the sale is above $95 per share.
There is still some extrinsic value in the options at $90 and below, although markets are wide and inactive, which tells us that the deal isn't 100% set in stone just yet. If the deal was done, none of these options around the stock price would have much value at all. As we get closer to the deal becoming official, keep an eye on these options prices around the stock price. The lower the bid prices get on these options, the more the deal is set in stone.
Mike Butler, tastylive director of market intelligence, has been in the markets and trading for a decade. He appears on Options Trading Concepts Live, airing Monday-Friday. @tradermikeyb
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