Best Way To Play Teavana

Teavana LogoTeavana (TEA) “operates as a specialty retailer of loose-leaf teas, tea wares, and other tea-related merchandise in the United States, Canada, and Mexico.” Earlier this month, Starbucks (SBUX) bought Teavana for $15.50 in cash and the deal was expected to close by the end of the year.

However, a week back, a short seller Glaucus Reasearch claimed that “independent laboratory tests show that Teavana’s teas contain pesticides in amounts that exceed U.S. and EU regulatory limits.” It advised that Starbucks walk away from the deal. Teavana shares immediately crashed below $15 and continue to trade between $14 and $15.

Glaucus Research does thorough work and focus on fraud at public companies. They have mostly focused on Chinese companies before Teavana. Their report is pretty through.

Now, I have no idea if the deal is going through. Obviously, the probability is still high that it will go through based on the Teavana stock price and option pricing. But there are some interesting ways to play this deal.

$15 May 2013 Calls

The simplest and best way to play this deal is to sell the $15 May 2013 calls. You can currently sell them at $.45 right now. For some reason they traded as high as $.50 yesterday and $.49 today. 

I am assuming that if the deal goes through, it closes at $15.50 and nobody comes in with a higher offer. If it does not, it goes below $15 and stays there. The stock was trading at around $10 before the deal and probably will drop below that if Starbucks reneges on the deal.

At the $.45 price, the probability the deal goes through is 90%. That is the highest out of all the options play. For example, the May 2013 $15 puts were trading around $1.50. If Teavana falls to say $7.50 if the deal falls through, it is pricing a 80% probability of the deal going through.

If you sell the 10 calls, your upside is $450 and downside is $50. A great risk/reward ratio.

Arbitrage Play

Since the probabilities are different for different option plays, there is more interesting ways to take advantages of this discrepancy. For example:

  • Sell 20 $15 May 2013 calls at $.45.
  • Sell 1 $15 May 2013 put at $1.50. 

You make money based on 2 simplistic scenarios.

 Scenario 1: Deal goes through at $15.50. You lose $100 on the calls, but make $150 on the puts for +$50.

Scenario 2: Deal does not go through and Teavana stock price goes to $7.50 and stays there till May. You lose $600 on the puts and make $900 on the calls for a profit of $300+. 

I have put in an order to sell May $.50 calls hoping somebody bites, but I may sell May  $.45 calls. 

Disclosure: I do not own any positions.

6 thoughts on “Best Way To Play Teavana

  1. Excellent post. Great analysis. I wish I could take part but my current job prevents me from taking any bearish positions (net neutral or not) in individual securities or their corresponding derivatives.

    Do you plan to initiate a position?

  2. I was going to sell the .45 calls May calls at the end of the day, but the price changed. The bid/ask went from .45/.50 to .40/.45.

    I actually saw the bid/ask on the May calls at .50/.55 on Thursday. I should have pulled the trigger.

    I will monitor the situation and see what happens.

    Somebody I talked to was able to buy the Jan 15 calls at $.30. That is a great deal as well.

  3. Hypothetically assuming you get to put on this option arbitrage play with the $.45 calls and $1.50 puts, are you worried that TEA may drop below $4.50 if the pesticides prove to be present and the deal fails to go through? Similarly, if the deal goes through, are you concerned with TEA’s stock price ever rising much above $15.50 (please correct me if I’m wrong, but it appears there is little room for error above the 15.50 take over price)? If so/not, why?

    I haven’t looked into the deal very much at all and have little knowledge of it, but is it even possible for TEA to rise above $15.50 if SBUX buys the whole company?

    • You never know how far the price of TEA may fall if the pesticides prove to be present, instead of the 20 call options, you could sell 30 call options, that way even if tea drops to 0, you would still come out even.
      In this scenario,
      you make $0, if it gets bought out for $15.50
      you make $750 if it goes to $7.50
      $0 if it goes to $0.

      I don’t think it will go above $15.50 since it’s a cash deal for $15.50. The only way it could go above $15.5 is if someone comes in with a better offer than SBUX.

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