Unusual Call Options Activity in Takeover Target GFL Environmental Stock
Heavy, unusual call options volume today has hit GFL Environmental (GFL) stock as its board is said to be weighing takeover offers around $50.00. The calls are at $45.00 with a high premium.
GFL is at $42.90 in midday trading, down 1.90%. GFL peaked last week at $43.93 on Sept. 4, as the CEO and the board said they are weighing offers that are “materially higher” than the current stock price.
Most analysts believe these offers are around $50, mainly from private equity firms. That would give it a takeover value of over $18 billion.
However, you must add the total enterprise value, given the company's heavy debt load ($9.6 billion as of June 30), and subtract $192 million in cash.
An updated balance sheet won't be available until November 4, when the company releases its Q3 earnings.
That makes today's unusual call options activity highly speculative.
Unusual Call Options in GFL Stock
The Barchart Unusual Stock Options Activity Report today shows that over 12,800 calls are expiring Dec. 18, 2026 (101 days to expiry) at the $45.00 strike price. That volume was over 45 times the prior number of calls outstanding at that strike price and expiry period.
However, the call option premium is very high: $2.74. That means that buyers hope to see GFL stock move over $47.74 per share in the next three months. That's over 11% higher than today's price.
Buyers' View: Most of these call option buyers are likely speculating that there will be at least a $50.00 takeover price and will occur within the next three months. In fact, I bet they are hoping it occurs before the next earnings release.
In other words, they are playing a merger arbitrage game, although most sophisticated players in this strategy wait until there is announced deal price and terms.
For example, if a $50 price is announced, GFL stock would move closer to $48.50 (i.e., a 3.0% 6-month-to-close merger opportunity).
Nevertheless, here is the potential takeover play, assuming a $50 price is announced and the stock moves to say $48.50, here is how the call options work out:
$48.50 - $45.00 strike = $3.50 intrinsic value + about $0.50 extrinsic value: $4.00 price
$4.00 / $2.74 cost = 1.46 -1 = 46% potential upside
However, speculators also have to take into account probabilities to see if there is a positive expected return.
For example, let's assume that there is a 70% probability that there will be a $50 takeover offer. That means the expected upside is:
70% x 46% = 32.2%
But the downside is 100% loss at a 30% chance:
-100% x 30% = -30.0%
So, the total expected return is positive: 32.2% -30.00 = +2.2% over the next month to three months
Seller's View: Sellers of these calls, especially covered call sellers (not including spread players) can make the following attractive yield:
$2.74/$42.90 = 6.39% over 101 days (just over 3 months)
Moreover, they would also make a realized capital gain of 4.895% ($45/$42.90 -1). So, the total expected return (ER) is:
6.39% +4.895% = 11.285%
The sellers, however, have an advantage, since, even if GFL stock stays flat, they get to keep the income earned by selling these covered calls.
The bottom line is that both plays are pushing the premiums for the GFL $45.00 call options higher over the near term.
Investors who want to copy these plays should keep in mind that these plays are highly speculative. For example, buying calls has the risk of potentially losing 100% of the total investment.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.