Worthless Stock Inefficiency: ATP Oil & Gas Equity ($ATPG)

ATP Oil & Gas equity ($ATPG) is actually up 63 percent since Monday, which was the first day of trading after the bankruptcy filing.

"What about option value of the common shares?," the efficient market theorists cry! Today, the company's secured (second lien) notes hit a new low of 26 cents - a market value of $400 million for $1.5 billion face value of debt.

The company's preferred stock traded at 1.7 cents. They will make over 50x if the equity is worth anything.

ATPG March 2013 $0.50 puts are offered at 34 cents. Assume they will be worth 45 cents after deducting for transaction costs. That is a very high return (~33% for ~6 months) with high expected value.? That is 75 percent annualized.

There shouldn't be 75 percent returns available for things that are pretty certain, like ATPG equity being canceled as part of its restructuring.

Maybe you think the stock won't be cancelled by March 2013. The January 2014 puts are only a few cents more. Those get you a 22 percent return.

What does the Kelly formula say? It says you should have your entire net worth long the ATPG puts, possibly hedged with the preferred or bonds.

Something else cool that you can do is use the expected profits on the put trade to fund purchases of the company's bonds, which seem cheap at 26. It is entirely reasonable to think that they could get 50 cents of value after all is said and done.

Source: http://www.creditbubblestocks.com/2012/08/worthless-stock-inefficiency-atp-oil.html

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