Speculating on a Tender Offer Using Options: The Case of RJR Nabisco

Tender offers can create a cash flow for shareholders which is similar to a dividend. Option prices will reflect the probability and magnitude of this "dividend." This paper shows that the value of a box spread is related to the discounted, risk-neutral probabilities of exercising both a call and a put at the same strike price. Thus, the box spread can serve as a state-contingent claim for the payment of a dividend, and it is therefore a natural vehicle for speculating on the success of a tender offer. We show how a box spread could have been used to speculate on the success of the KKR tender offer for RJR Nabisco.