Walgreen's Risk Reversal

Walgreen's reported earnings today that were not as bad as feared. Many thought that Walgreen's earnings estimates were too high without Express Scripts. That does not seem to be the case and the worst case scenario seems to be off the table.

Walgreen's trades at a lower valuation than CVS, even assuming that Walgreen's and Express Scripts never make up. That is unlikely given that it is in both their interests to come to an agreement. I admit to having been wrong about this for a long time but my opinion has not changed. It makes sense for them to make up before the PBM selling season is over as Express Scripts and Medco are likely to lose a lot of business without Walgreen's and have to price more aggressively on the contracts they keep.

I have added to my Walgreen's position through April risk reversals. I have sold the 33 Puts in order to buy the 36 calls for even money. It makes sense for Walgreen's and Express Scripts to come to an agreement sooner rather than later. I believe we can see an agreement in the next few weeks. At the same time with results being less worse than feared, I believe the downside is limited.

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