CAPRI Calls
Capri November 2024, calls are trading for $0.5. They could be worth 2X more if the proposed merger between Tapestry and Capri closes.
As the FTC’s trial against Tapestry kicks off tomorrow, I’m taking a risk on Capri (CPRI) call options. With a potential upside of over 200%, this could be the trade that makes my year.
The Deal
If Tapestry wins its lawsuit, Capri’s calls could explode. I’m eyeing the November 15 2024, $55 strike calls, which are currently trading for only $0.5. If the deal goes through, they could be worth $1.5. That's a potential 200% return – a pretty attractive outcome, if you ask me. Take the $57 offer price in the merger agreement minus the $55 strike price and deduct the $0.5 call premium. The residual value is $1.50.
Why take the risk?
Asymmetric Payoff: The potential upside far outweighs the downside risk.
Hard Catalyst: The court’s decision will be a binary event expected by end of year.
FTC Flaws: The FTC’s case is shaky, and their definition of “accessible luxury” is questionable.
The FTC's Case
The FTC has argued that the merger would create a monopoly in the U.S. accessible luxury handbag market, leading to higher prices for consumers. While price is a factor, it’s not the only one. The luxury market is a lot more nuanced than that. Consumers often see higher prices as symbolic of exclusivity and quality. Historically, luxury brands have been destroyed by price reductions and increased discounts, tactics that the FTC considers competitive.
The Odds
Current option market prices suggest that the deal has less than a 33% chance of closing. However, I believe the odds are higher. There's been no industry pushback to the deal, regulators in the EU and China have already approved the merger, and the FTC's arguments about pricing and market definition seem flawed.
The FTC's Flawed Market Argument
The FTC's attempt to distinguish between mass-market and accessible luxury handbags is questionable. While the FTC claims that mass-market bags are made from synthetic materials and produced in large quantities. Capri’s brands also utilise synthetic materials such as polyurethane. By excluding mass-market bags from its competitive analysis, the FTC overstates the potential for a post-merger monopoly.
The Bottom Line
I'm bullish on CPRI and believe the upcoming court decision could significantly impact its share price. That's why I'm buying November 15, 2024, $55 strike call options. While the outcome is uncertain, the low implied probability, asymmetrical payoff, and potential for a near-term catalyst make this investment a risky but potentially rewarding option. Size appropriately!
Disclaimer:
The information and opinions expressed on this blog are for informational and educational purposes only and should not be construed as financial advice, investment recommendations, or solicitations to buy or sell any securities.
Great breakdown, thanks for sharing! Hedging with a long position in Capri is a clever move in this case, and with the court decision so close, this could be an absolute banger if it plays out as expected. Excited to see how it unfolds!
this is a large company and.should be covrered by a lot of analysts. but still, the expected payoff seems too good to be true. i wonder what are some risks that we may have not taken into our calculations.