What is up with WAG?

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Step into the Wednesday time machine and not much happened between then and today.  Traders have been so lulled into a stupor with the lack of movement that they bid volatility up to 15% yesterday when it looked like there was another crisis brewing.  As of today no crisis, as holders of GOOG and other earnings reporters rejoice in the upside surprises.

 

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As volatility drops pretty much everywhere it is not down one wit in WAG.  My favorite drugstore is bucking the trend by mulling over a complete takeover of Boots in Europe thus saving tons of money in taxes and jacking up the value of the company.  WAG management has been kind enough to let folks know that the end of August is when they will make their decision.

 

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Analysts say $80 will be a good spot for WAG and it seems plausible if they do the tax inversion.  If they don’t probably mid 60’s as the hot money piles out.  Note the skew is flat to slightly upward sloping which is not normal for a company with low IV like WAG.  It is not normally a company traders buy upside calls in but it is now.  We will have to wait until August end to see what happens.

The Trade

A butterfly centered around $80 in the last Aug Weeklys cycle should work.  Buy an ATM put to hedge and most likely to get this to work buy more butterflies than you buy puts as the risk reward from the skew is favorable. Check out the Pit Chat on Monday to see how to set this up if confused.  Email me at Andrew@option.com for a free week of the Pit Chat.

 

Disclosure: Positions in WAG and GOOG

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