Aurelia's Put Options on Mediobanca: Balancing Risk in a High-Stakes Merger

The upcoming September 25 shareholder vote on Mediobanca's proposed merger with Banca Generali has thrust the Italian banking giant into the spotlight, with its stock price hovering at €15.30—well below the strike prices of Aurelia's put options. As the clock ticks down to the critical vote, the asymmetric risks tied to Aurelia's derivatives position could amplify both rewards and losses, depending on whether the merger succeeds or collapses.

Aurelia's Put Options: A Delicate Hedge or a Liability?

Aurelia has sold put options on 100,000 Mediobanca shares with a strike price of €20.00 (expiring December 19) and 250,000 shares split between €17.50 and €17.00 strikes (expiring April 17). While these transactions were initially structured to capitalize on Mediobanca's undervaluation (currently trading at a 15% discount to peers), their exposure is now intricately tied to the September vote's outcome.

The chart above highlights the stock's volatility since the merger was first announced, with a 6.7% drop in response to regulatory hurdles and shareholder opposition.

The September 25 Crossroads: A Binary Outcome

The merger's fate hinges on whether Mediobanca's shareholders approve the acquisition of Banca Generali—a deal critical to fending off a hostile bid from Monte Paschi di Siena (MPS). Key risks include:
- Shareholder Opposition: Major stakeholders like Caltagirone (10% stake) and Delfin (20%) oppose the merger, pushing for governance changes or asset sales. Their collective 30% ownership could block approval.
- Regulatory Scrutiny: The ECB may reject the merger due to liquidity concerns, forcing Mediobanca to deleverage its €3.3 billion in non-performing loans.

If rejected, Mediobanca's stock could plummet by 20–30%, triggering Aurelia's obligation to buy shares at the €20 strike (a €4.70 gap below current prices). Conversely, a merger approval might stabilize the stock near €15–€16, leaving Aurelia's puts unexercised and netting premiums of €2.30 per option.

Asymmetric Risk: Why the Downside Outweighs the Upside

The risks are asymmetric because:
1. Loss Potential: If the merger fails, Aurelia's capital is at risk of being drained to cover put obligations. With its mining ventures (e.g., Great Cobar) already demanding liquidity, this could strain its balance sheet.
2. Reward Ceiling: Even if the merger succeeds, the upside for Aurelia is capped at the premium collected—€2.30 per option—while the downside could total millions if Mediobanca's stock collapses.

Investment Implications: Navigating the Uncertainty

Investors face three strategic paths:
1. Bullish on the Merger: Buy Mediobanca shares (target: €18–€20) and sell call options against them. If approved, the stock could rally, while calls hedge against overpayment.
2. Bearish on the Merger: Short Mediobanca stock (target: €12–€13) and buy put options with lower strikes (e.g., €15) to amplify downside gains.
3. Neutral/Hedged: Avoid direct exposure and instead invest in broader European financial ETFs (e.g., EUO), which offer diversification away from merger-specific risks.

Final Verdict: Proceed with Caution

The September 25 vote is a pivotal moment for Aurelia and Mediobanca. While the merger's success could stabilize Aurelia's position, its asymmetric risk profile demands a conservative stance until post-vote clarity. Investors are advised to avoid new positions in Aurelia's derivatives and instead monitor Mediobanca's stock closely. A “wait-and-see” approach minimizes exposure to the binary outcome, while hedging strategies (e.g., inverse ETFs or put spreads) provide flexibility.

In short, this is a high-risk, low-reward scenario—ideal for speculators but perilous for the risk-averse. The scales of success and failure are equally balanced, and only time will reveal which side tips the market's favor.

This final visualization underscores the critical link between Aurelia's ability to honor put obligations and its financial resilience—a metric investors should scrutinize closely.