If your playing this speculative buyout with options,timing and strike will be critical. After the buyout,95% of the time value will dissapear from all options,and they will become nothing more than a straight derivative,the key is to not go too far out,as the time value will dissapear,and not too high a strike in case its sold for under 100,my thinking is sept. 80 or oct. 80 calls,from next week wendsday on,my only concern is maybe the deal isnt announced until last week of september,any thoughts anyone??
"my thinking is sept. 80 or oct. 80 calls,from next week wendsday on,my only concern is maybe the deal isnt announced until last week of september,any thoughts anyone??"
Here's one way to play it and make some money at the same time.
If your thinking is that the announcement won't come till after Sept expiration (Sept 17) --- a very distinct possibility --- then put on the following call spread:
Let's say you are willing to spend $10000 to buy calls on an assumed buyout. You don't really know if the buyout will come prior to Sept expiration (17 Sept) or Oct expiration (22 Oct). But you are assuming it will come before 22 Oct. Here are the best ways to incorporate that uncertainty.
1) The most direct way is to buy the October 80 calls for $6.10 each (actually $610 each since each call contains 100 shares). Your budget would buy you 16 calls. Eliminates any uncertainty. If IDCC goes for $100 on the buyout, then the total profit = $22,240 ($1390 profit per call).
2) If you want to spend less money and gamble that the buyout comes before 17 Sept, then buy Sept 80 calls at $3.10 each. Your $10,000 would buy you 32 calls. Incorporates much uncertainty. Total profit = 32 * $1690 per call = $54,080.
3) The BEST way to manage uncertainty is to do this. Suppose the odds of the buyout occurring before 17 Sept are 50-50.
Then buy 22 Oct Call 80's (at $610 each) for a total of $13,420. Sell 11 Sept Call 80's (at $310 each) for a total of $3,410. Your cost for this position will be $13,420 - $3,410 = $10,010.
So, if the announcement comes before 17 Sept, your 11 Sept 80 calls will be covered by 11 of the Oct 80 calls, so their profit is $0. But your 11 Oct 80 calls will be in the money for $2000 each, or a total of 11 * $2000 = $22,000. Total profit will be $22,000 - $10,010 = $11,990.
If the announcement comes after 17 Sept but before 22 Oct, then your Sept calls expire worthless, and you keep the $3410 premium collected for them. Further, your 22 Oct 80 calls are each worth $2000, for a total of $44,000. Net profit from this scenario = $3410 + $44,000 - $10,010 = $37,400.
So there you have 3 different scenarios, each with its own way of managing the risk in the timing of the announcement. Obviously guessing correctly that the buyout will happen prior to 17 Sept gets you the highest profit. But taking into account the uncertainty surrounding it, the ratio call spread will get you the best profit no matter when it happens.
Let me know if you have any questions. (You can model this in a spreadsheet to determine the best ratio to use if you want to use something other than 50-50 for Sept - Oct occurrance).
Of course profits are higher if buyout is for more than $100!
Then buy 22 Oct Call 80's (at $610 each) for a total of $13,420. Sell 11 Sept Call 80's (at $310 each) for a total of $3,410. Your cost for this position will be $13,420 - $3,410 = $10,010. ----------------------------------------------------------
But what if a buyout comes in at say $150 share and is announced before the Sept calls expire? Now the Octs will be in the money big but the Septs will require delivering on those shares. So those Sept calls that were sold would be worth (approx $150-70) ~$80 each contract. So either the person has to buy shares to deliver or else buy those contracts back for well over $60 each contract. That seems like a major loser to me. No way the Octobers are going to gain enough to mitigate the risk of the Septembers going to the moon.
what if i buy 14 cotracts sep calls at 6.10 strike price 70 what would be the pay out if its announced buyout at 100 ..what would i make..thx acctualy to be honest i did it already today!!! 6.10 14 conracts strike price 70 sep 17 exp ....thx
i agree but I still get nervous buying sept and even oct. I am happy with my jan12's. In the event of a buyout, I will do fine assuming and hoping it is above 90. Less than 90 and I get stuffed. If buyout doesnt go through, or is dragged out, I still have jan12 80's in a company that is profitable and who's value will probably be around 80's or higher by Jan anyway. If you have extra money that you are comfortable with losing then why not buy some oct calls and roll the dice.