Airliner Spirit Airlines (SAVE) dropped nearly 9 percent on Monday on a report that its potential acquisition would likely face an antitrust lawsuit from the Department of Justice. One trader sees a further decline for shares ahead.
That’s based on the April $17.50 puts. With 44 days until expiration, 22,833 contracts traded compared to a prior interest of 330, for a 69-fold rise in volume on the trade. The buyer of the puts paid $2.01 to make the bearish bet.
Shares recently traded for about $16.50, making the option about $1.00 in-the-money. That’s about half the price of the proposed buyout offer for $33.50 per share.
Spirit has been courted by a number of airlines, but following years of industry consolidation, it’s possible that any buyer would face antitrust litigation. While the share price has been knocked around, the stock now goes for about 11 times earnings, and 0.4 times its price to sales.
Action to take: Shares are potentially undervalued here, but could go lower if a buyout deal completely falls through given today’s volatile markets. Interested investors may want to wait on the sidelines for now.
For traders, official news of an antitrust suit would likely give the stock a reason to make another leg lower. That makes the April puts an interesting trade, although one that will likely only deliver mid-double-digits given that it’s already in-the-money.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.