DirecTV (DTV): Here’s How to Profit Using a Little Merger Arbitrage

By now, every investor has to know that AT&T Inc. (NYSE:T) made a buyout offer to DirecTV (NASDAQ:DTV) early in 2014 for $95 per share.

DirecTV, DTV, DTV stockThis is a very complex merger between two gigantic companies, each of which has an extensive telecom network — not to mention all those satellites floating around, transmission networks, cables and wires.

As complex as it is, however, there is just no way it will be blocked by the federal government. It takes an awful lot to stop a merger.

There’s also so much money floating around in politics that you have to believe both companies are contributing behind the scenes to make sure the merger goes through.

Beyond all this, my business contacts in the entertainment industry all say the merger will happen. And don’t forget that Warren Buffett of Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) added 326,500 shares to his DTV position last year. Obviously he believes the merger will consummate as well.

Despite this, a band of naysayers controls market perception, apparently. DTV stock should be trading near $95, and yet has spent most of the past year under $87.

But no matter how ridiculous it is, the uncertainty created by the mega-merger means you can profit. Here are several ways to play DirecTV stock and take advantage of this merger arbitrage opportunity.

Buy DTV Stock Before the Merger

First of all, the DTV merger is expected to close this spring. I figure that means before July 1. The simplest and most obvious play is to just buy DIRECTV stock here at $86.50. The way I see it, come July 1, DTV will be trading at $95 or so. Why not take the $8.50 in capital appreciation and sail off to Brazil?

That’s a return of 12.3% for a 13-week holding period, or a 49% annualized return.

What if you get stuck with DTV and the merger doesn’t go through? Cry me a river. You get stuck owning the premier satellite TV provider in the country with a massive presence in Latin America. You don’t think some other entity will try and buy it out?

Play the DTV Merger With Options

Another play, if you want to hedge your bet a little, is to buy the underlying DTV stock and sell a covered call against it. So perhaps you buy the stock at $86.50 and sell the Jun $87.50 covered call for $3. First, you collect a 3.4% premium, which is 13.6% annualized.

If the stock gets called away, which it likely will be, you pick up another $1 in capital appreciation, for a total of $4. That’s a 4.6% total return.

You can also do what I’ve been doing since the merger was announced, and that I just did again today. I’ve been selling naked puts a few months out, collecting the premium, and doing it again when expiration arrives.

I sold the Jun $87.50 naked puts for $3.80, generating a 4.4% return. You can do the same. If the stock gets put to you, as happened to me just this past weekend, you can turn around and sell a covered call or just sell the stock and take the loss, which will likely be offset by the premium you received for the naked put.

The last play I’m considering is to buy the Jun $90 calls for $1.70. If the merger closes, then the stock goes to $95 and I collect a profit of $3.30 per contract.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He is the manager of the forthcoming Liberty Portfolio, has 20 years’ worth of experience in the stock market and has written more than 1,200 articles on investing. As of this writing, he had sold naked DTV Jun $87.50 puts. He can be reached at

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