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Penwest Price Jump Elicits Put Purchase as Legal Threat Emerges

Today’s tickers: PPCO, BPOP & CVBF

PPCO Penwest Pharmaceuticals Co. – Shares in the pharmaceutical company that has agreed to sell itself to Endo Pharma Holdings are 5% higher today at $4.97. Penwest shareholders would receive $5.00 per share assuming the deal goes ahead. The deal price is twice the value shares in the company were trading at as recently as March this year and 25% above where they were a week ago. Still, a press release made by one legal company today claims an investigation of the Board of Directors is due and will consider a neglect of its fiduciary duties amongst other issues for failing to shop the outfit to potentially deeper-pocketed suitors. One option investor stepped up to ensure that a soured deal doesn’t cause any financial distress after shares have jumped. The investor scooped up 10,000 put options at the $5.00 strike expiring in December, paying just over five cents granting the privilege to sell the stock at that price. Looks like a low-cost wager in the event the Board is forced to bow to pressure and the buyer washes its hands of the company. However, such legal shenanigans can disappear as quickly as they arrive on the scene.

BPOP Popular Inc. – An analyst upgrade to “overweight” for the consumer financier and mortgage lender has sent its shares jumping by almost 7% to $2.79 this morning. The bank has a market capitalization of just $2.8 billion and operates in the southern part of the U.S., Puerto Rico and the Dominican Republic. About one month ago it appears an investor, possibly a bull on the bank, bought some protection against slippage in the share price by taking on board 10,000 put options at the $2.50 strike price. The trade was possibly made as insurance against a long position on the underlying. Following today’s positive news on the bank, the investor appears to have sold the protection possibly for a loss of up to 25% on the strategy. The trade went through at around 30 cents compared to what appears to be a purchase price of 40 cents in July. Still the shares are up nicely from $2.50 at the time. Some of the loss of premium is also due to a sharp decline in the implied volatility on the options, which has shrunk from 74% to 57% making the loss on the put options actually seem mild.

CVBF – CVB Financial Corp. – News overnight that the west-coast mortgage lender received a subpoena from the SEC asking about how it handles troubled loans has sent the share price down more than 20% on Tuesday to $8.05. Its options have been relatively busy also but the put action option smacks of a contrarian play in a hope that the news is fully discounted or that an investor suspects no wrongdoing by the bank. Investors appear to have written put options expiring in both September and December expirations using the $7.50 strike price implying rising losses on account of a further 6.8% share price decline. Even then the writers are bringing on board elevated premiums courtesy of a 35% jump in options implied volatility. The cost of insuring against a long stock position from a decline beneath $7.50 before year end has risen to $1.00 today implying a break-even point of $6.50 for a buyer. Today’s selling pressure assumes that the bad news will likely fade sooner rather than later.


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