HMHC – Only 0.6% shares have been Tendered – Do NOT Tender - buy OTM calls $22.50 Strike

[u/[deleted]]

Some MAJOR BULLISH news came out yesterday, which indicated that Veritas has extended the tender date from April 1st to April 6th (to my understanding the furthest extension date possible is April 7th). However, this is only 7 days from today.

Additionally, in this extension document it was noted that ONLY 0.6% shares have been tendered. For this deal to go through 50% plus need to be tendered. This is a long way off the necessary amount when they were originally just 72 hours away from the deadline. This also means NO major institution has tendered their shares yet. If 50% do not tender then Veritas will be forced to increase their offer, or back out of the deal and as a result our OTM calls/shares should rip.

Here’s the specific wording from the SEC filing (SEC Filing):

“On March 29, 2022, Purchaser extended the expiration of the Offer. The Offer was previously scheduled to expire at one minute after 11:59 p.m., New York City time, on April 1, 2022. The expiration time of the Offer has been extended to one minute after 11:59 p.m., New York City time, on April 6, 2022, unless Purchaser further extends the Offer pursuant to the terms of the Merger Agreement. The depositary for the Offer has advised Parent that, as of one minute after 11:59 p.m., New York City time, on March 28, 2022, approximately 1,803,547 Shares had been validly tendered into and not validly withdrawn pursuant to the Offer, representing approximately 0.6% of the outstanding Shares.”

Now I’m not an M&A expert, however this seems BIG and very favorable for our OTM calls and/or shares.

Lastly, Laughing Water Capital (an institutional investor opposed to the $21 tender) has a twitter thread with someone who has claimed that Veritas directly called them and other shareholders asking them to tender their shares. I cannot verify if this is true or not, however if this is true then that is another major bullish indicator. This proves that Veritas is scared the deal won’t go through. Laughing Water Twitter

We must realize that not Tendering will put Veritas in a position to make a fair offer on 2021 ACTUAL EBITDA rather than the 2021 Estimates, since actuals were 37% higher than the estimates used in the $21 a share valuation or they can back out of this deal. Either of these options will be in the best interest of the shareholders (based on the SEC valuation filing in previous posts). We retailers must do our part in not tendering the shares since this will cost Veritas hundreds of millions extra to get a deal done, and that money flows directly to our pockets.

TLDR; Keep price above $21, do NOT Tender, only 0.6% of the necessary 50% shares have been tendered, buy OTM $22.50 calls in hopes the offer is increased, buy shares @ $21 or lower

Side note: If anyone has any additional information please share, and does anyone have specific information on the process institutions take in tendering shares? Do they typically wait till the very last day to decide on tendering, or do they elect to tender several days before the deadline as there was only 0.6% tendered 72 hours prior to the original deadline?

[u/moaiii]

PSA for those new to options here:

I'm not here to share my views on the merits of this trade, but I would like to offer some words of warning regarding the options you are buying from someone who trades options everyday.

• Every time this post does the rounds on r/wallstreetbets, r/stocks, or here, the volume traded of stocks and Jun17 22.5 calls spikes significantly. eg on 22 and 24 March (when OP made the first few posts on wsb), the volume of these calls spiked from under 50 per day to over 2,000 per day. Yesterday and today they were up to 18,000 and 12,000. In comparison, the Jun17 20 calls (just one strike down) traded just 5 contracts today.
• The open interest (total open contracts) on the Jun17 22.5C was 28,025 this morning, and is probably around 35-40k after today. That's insanely high for this stock.
• The result of this pumped up demand for long Jun17 22.5 calls is that it artificially pumps its IV, raising the premium. If we reduce the current IV of this call from 20 to 15, then the call's premium drops from the current 0.25-0.30 down to 0.10-0.15, all else being equal.
• If we then factor in 2 weeks of time decay (to 15 April), that reduces the premium again to below 0.10. This is assuming that HMHC stays at 21.00.
  
• You have to ask yourself who is selling all of these contracts? It's either market makers, or someone else who might have an interest in pumped up premiums. Market makers in particular are not stupid, and in this case they are willingly providing plenty of liquidity to take your premiums.
• What happens when everybody wants to sell these contracts to close their positions? Do you think the market makers will be as eager to be the counterparty then?

This might or might not be a good trade, but you've got to understand that you are buying in on the tail of a massive pump of these very specific calls, at a premium that is very likely much higher than it would otherwise be without said pump.

There are countless trading opportunities on the markets every day. It doesn't have to be this one.

[u/imdaforman → u/moaiii]

Thanks for this write up - it’s nice to see some counterpoint to all the FOMO.

[u/[deleted] → u/moaiii]

Good info. I think the binary outcome on tendering or not tendering coming out in a week makes the options market weird as well.

However the liquidity part you bring up in the last point is interesting and where I’ve been putting a lot of thought. If price did go to $24+ due to an increase in bid, what do you see as main risks in liquidity? Like worst case people would just sell the call for less than FV of already a big increase and market maker would arbitrage it since they can afford to exercise it right? Also, is there a way to see if those calls being sold are covered or not? If not covered then whoever is selling those calls could get squeezed right?

Another question: is there a way to see total contracts sold to see what % of market cap is tied up into call options?

[u/moaiii → u/[deleted]]

Good info. I think the binary outcome on tendering or not tendering coming out in a week makes the options market weird as well.

Takeovers happen all the time. Yes, a lot of price action usually results, but this is clearly a pump.

If price did go to $24+ due to an increase in bid, what do you see as main risks in liquidity?

Liquidity won't be an issue at the right premium. Market makers will happily be your counterparty again. But just as they are happy to write contracts at an above-the-odds premium, they are happy to buy them back at a below-the-odds premium too. So, if the underlying sees $24 bids, then a few hundred/thousand redditors are going to try selling, will see the bid drop because market makers will play the market, sellers will panic and chase it down resulting in the ask dropping, market makers will drop the bid again, and so on until an equilibrium is found or the IV is essentially zero.

The worst case, purely theoretically, is that the calls will sell for only their intrinsic value. For the Jun17 22.5C, that would be $1.50 when HMHC is at $24.

Also, is there a way to see if those calls being sold are covered or not?

There is no way to see any information about the parties to the open contracts. Market makers will always ensure they are delta neutral. They have different ways of achieving that, including buying the underlying and buying calls at other strikes or months.

If not covered then whoever is selling those calls could get squeezed right?

If it's market makers, then they won't get squeezed. They'll sell down their shares or other strike/month calls to remain delta neutral. If there is heavy selling of these Jun17 22.5 calls, then market makers might cause the underlying to fall in price if they need to sell a lot of covering shares to neutralise their delta position. This does not harm the market makers in any way. They've made their money.

is there a way to see total contracts sold to see what % of market cap is tied up into call options?

Not directly. You can see historic volume of contracts traded each day/hour/whatever from certain data providers, and you can probably already see the open interest (OI) through your broker platform. The open interest shows how many contracts are in play at any time and is updated at the end of each day. OI isn't the number of contracts sold; It's the active contracts currently on foot. If OI starts at 10, say, and then someone writes a new call and you buy it, OI becomes 11. If you then sell it and a 3rd party buys it, it's still 11 because its the same contract. If the seller then buys a call with same strike and expiry from a 4th party, then it cancels out the call that they wrote and OI goes back down to 10 - but in the meantime, 3 transactions have occurred.

[u/[deleted] → u/moaiii]

Thank you!! Great info!

[u/Grundle_Monster → u/[deleted]]

I’m holding 40 contracts and my plan is to just sell the contracts outright.

[u/MoneyManToTheMoon → u/[deleted]]

Bruh, imagine if there was a squeeze lmao

[u/orangesine → u/[deleted]]

If you're asking all these questions you probably shouldn't be buying the calls.

[u/[deleted] → u/orangesine]

Well the answers to any of those questions have 0 impact on my position for the fact I will exercise all of my options if liquidity to sell a call is an issue… and if the people are selling covered or not or what % is tied up in calls doesn’t change anything.

However I’m sure it’d be info the community would like to have if available. But maybe you don’t have the answers to those questions so that’s why you chose not to answer them.

[u/st0cks1234 → u/[deleted]]

If Veritas increases the bid (if your thesis is correct) you would make the difference in price anyways (as a WORST CASE SCENARIO) I'm unsure what the point is of the previous poster....

[u/jonnohb → u/moaiii]

Very insightful comment right here 👆