Since Clear Channel’s prospects are decidedly unclear, option traders are playing the volatility angle, said Rebecca Engmann Darst, equity options analyst at Interactive Brokers Group.

“This morning’s news that radio broadcaster Clear Channel’s long-bedraggled takeover by T.H. Lee Partners and Bain Capital may indeed be dead air sent its shares plummeting,” Darst said.

“With more than 300,000 options trading in the first two hours of the market, Clear Channel is the most active ticker on our platform by a long shot,” Darst said.

It looks like April “strangles” — a spread trade involving both puts and calls at different prices — are the preferred vehicle for option traders on Wednesday, Darst said.

“In this case, traders are both buying and selling Clear Channel April put strikes as low as $20 and April calls as high as $37.50 and at every strike in between,” Darst said.

If traders are buying the strangle, then they are expecting big share price movement outside the range of these strike prices. If they are selling the strangle, traders are likely taking advantage of a high implied volatility environment and cashing in on the expensive option premiums as they bet that shares will remain rangebound, she said.

Given the fact that Clear Channel shares have traded consistently below the $39.20 offer price ever since the takeover deal was announced, it’s obvious that the market has never been comfortable with its valuation, Darst said.

“And the ambivalence is no less abated with the original deal now apparently in its death throes,” Darst said.

She also noted that out of Clear Channel’s 966,000 option contracts still outstanding, more than 40 percent is concentrated in April puts at strikes $25 to $32.50. Shares of Clear Channel shed $5.19, down 15.9 percent, to $27.37 on the New York Stock Exchange.

(Reporting by Doris Frankel)
(PHOTO: Reuters)