Back in February of this year, I published an article based on research done by a colleague of mine — Joe Cornell, CFA, founder of Spinoff Advisors and author of Spinoff to Payoff — about a pair trade investment involving Yahoo! (YHOO) and Alibaba.com (BABA). With all the turmoil in the Chinese markets, Alibaba has been hit pretty hard and the OTM put option position has generated unrealized gains of around 40%. This was a speculative transaction for me from the beginning, and an experiment to see what the mechanics of a spinoff were as they related to options. The Yahoo! leg of the transaction is still open, but I have decided to take profits on this leg of it opportunistically.
UPDATE (9/1/2015)
This morning, Alibaba (BABA) fell heavily at the open and I was able to take profits on my put option struck at $77.50. My per-contract net realized gain was $828.40, which represents a percentage gain of 134% over a period of 189 days — just over six months. The price of the Yahoo (YHOO) leg of this paired transaction totaled $684.00, so locking in my gain on the BABA leg today means that no matter what happens to YHOO’s stock price post-split, I will make, at worst, $144.40 per paired “unit” (i.e., one contract of long BABA puts and two contracts of long YHOO calls), which equates to a period percentage return of 17.4%.
The YHOO leg of this transaction remains open and I will hold it until the split to see how the logistics of holding the options of a spinoff work in practice.