More Arbitrage Trades

A couple more merger arbitrage trades popped up on my radar this week. First up is Pharmaceutical Product Development(PPDI). PPDI is being bought out by two private equity groups: The Carlyle Group and Hellman & Friedman. They have offered $33.25/share and are expecting to finalize the deal late this year. I sold a January $32.50 put for $1.06 this morning. With margin requirements of about $800, this will give me better than 13% return...not too shabby for less than 4 months.

• Sell to Open: 1 PPDI Jan 21 2012 32.5 Put @ $1.06

Telvent GIT(TLVT) is being bought out by Schneider Electric(SU.FR) for $40/share. The options prices are very attractive despite the stock being up almost 5% this morning. I don't know if I'm missing something on this deal, but everything I can find seems to indicate it's a done deal. I might end up regretting this one, but the returns are high enough I'm going to take a chance on this. I sold the February $40 put for $3.20. That comes out to about 28% return on margin in about 5 months.

• Sell to Open: 1 TLVT Feb 18 2012 40.0 Put @ $3.20

There's another one I've got my eye on as well. Temple Inland(TIN) being bought out by International Paper(IP) for $32/share. Right now the option premiums aren't very attractive and the deal isn't expected to close until next February. Rather than tie up margin for that long, I'm going to wait and see if I can get a better option prices down the road.

The Numbers

• Cash: +$426
• Short Option: -$525
• Margin: -$1,900

Update/New Trade

I'm not very good at this regular updating thing apparently. And since these aren't the only trades I make, it is tough sometimes to keep track of the model portfolio as well. I will try to get that up-to-date this week and hopefully there should be more regular updates.

A couple updates to make. In my last post I was looking at different ways to handle my LZ naked puts. I ended up buying those back for a nickel instead of rolling them out, so that trade is closed out.

I also entered into a couple new merger arbitrage trades. The first was Motorola Mobility Holdings(MMI) which is being bought by Google for $40.00/share. The other one was NetLogic Microsystems(NETL) being bought by Broadcom for $50.00/share. The recent volatility has widened the spread on both of these, but I will list the prices I got for them.

• Sell to Open: 2 MMI Apr 21 2012 39.0 Puts @ $1.60
• Sell to Open: 1 NETL Apr 21 2012 49.0 Puts @ $1.50

I realize that's a bit of revisionist posting, but since I could likely get even more for both of those today, I'm not going to worry about it too much. I will use the current market value for the short option and margin values.

The Numbers

• Cash: +$470
• Short Option: -$1100
• Margin: -$3600

Option Expiration Update

I've been out of town working again and haven't been making any published trades. But option expiration is coming up, so there is one trade I need to update.
The September LZ puts I sold as a merger arbitrage trade a little while ago is coming up on expiration and since the merger hasn't been completed yet and the stock is trading below the strike price. The puts for future months are exremely illiquid at the moment, so I may not be able to roll them out. If that happens, I can either buy back the puts or take the stock. Unfortunately, with the high bid/ask spreads, there's a good chance I wouldn't be able to buy them back for a reasonable price. Here is what I am going to do: I will put in a good-till-canceled order to roll them out for a small credit, most likely to the January or March expiration for $0.05 or $0.10 credit. All I really want to do with the credit is cover my commissions for the trade, anything above that is a bonus. If that trade doesn't get executed, I won't worry about it and will take the stock and wait for the merger to be completed to get the $135/share in cash. I'm not sure when I'll be able to post again as I'll be down here in Texas working until right before I leave for vacation in Germany(Oktoberfest baby!!). When I get a chance, I will post an update with how the trade played out.

More MSFT Calls

I've been waiting for MSFT to rise enough to be able to sell weekly calls against it at $27 or $28, but it's just not happening. Instead I'm going to take advantage of the higher volatility in the market to get a higher price on some further out calls.

• Sell to Open: 1 MSFT Nov 19 2011 28.0 Call @ $0.47

This will give me an immediate 1.8% return in cash. Given the market weakness and Microsoft's price action the last year or so, I don't expect the stock to get called away from me by November, but if it does, I'll close out the trade with over 10% capital gain(plus the 2+% I got in covered call premium) in just 6 months.

The Numbers

• Cash: +$47
• Short Option: -$48

Rolling CSCO Again

My latest set of CSCO puts will expire this week. CSCO has been hanging right around the $16 strike price and normally I'd wait until Friday before rolling them forward, but I'm heading on vacation for a week. Instead of possibly getting put the stock, I'm going to take advantage of the recent volatility and just roll them out now.

• Buy to Close: 2 CSCO Aug 20 2011 16.0 Put @ $0.23
• Sell to Open: 2 CSCO Oct 22 2011 16.0 Put @ $0.96

This brings the total premium I've collected on these puts to $1.37. If I do end up getting assigned the stock, it brings my purchase price down to $14.63...over 7% below the current price. If they expire worthless in October, I'll have made about 32% on margin requirements in just 5 months(going back to the original June 03 puts).

Update: Expired!

Natural Gas and Encana

Damn, the market has been a bit surly lately hasn't it. On the plus side it's knocked about 10% off the price of Encana(ECA). Encana is a large natural gas producer that has been on my list of buys for awhile. If you're bullish on natural gas in America(and it's hard not to be with the fuel as cheap as it is right now), ECA is a great play. Instead of buying the stock outright though, I'm going to conserve some cash and take advantage of the current volatility by selling puts. Standard naked put trade here...if it recovers I keep the cash for a decent return on margin. If it keeps falling, I get to buy ECA at a discount to today's price.

I sold an October 27 put for ECA this morning for $1.31. At that price, our breakeven point for ECA is $25.69...an additional 7.5% below today's price. At that price ECA's dividend yield on my cost would be above 3%. If it expires worthless, I keep the $1.31 for a 21.4% return on margin in just 3 months. That's over 80% on an annualized basis!

• Sell to Open: One(1) ECA Oct 22 2011 27.0 Put @ $1.31

The Numbers

• Cash: +$131
• Short Option: -$135
• Margin: -$611

Back at it

I had to be out of town for work for a few weeks on short notice, so the blog has been idle. My trades did well during my absence, although there's been some pullback with the recent debt ceiling debates. On a side note, I'm definitely not an economist, but I'm not too worried about the debt ceiling...I see it as all political bullshit. The real problem(spending way more than we can ever get in tax receipts) isn't going to be solved this year, next year, or probably ever. It's going to take a major financial crisis, like the dollar losing it's place as the world's reserve currency, for any real change to happen. I have absolutely no idea when that would happen, but by then it will probably be too late to do anything anyways. But I can't control the US economic and monetary policies, so my plan is the same as it always is: Make hay while the sun is shining. I'm gonna keep doing my thing and making money until it stops working.

Today I took on some merger arbitrage trades. This type of trade is one of my favorites. The returns can be a little smaller, but they're very safe. I find companies that are being bought out and sell naked puts with strikes near the buyout price. In order to control my risk, I only do this with cash-only deals. If a deal includes stock as part of the purchase, the final purchase price can fluctuate with the buyers stock price. The liquidity of these options can be very low, so the bid/ask spread tends to be very wide. This makes patience and limit orders an absolute necessity. I see three quality plays, but one of which(Lubrizol Corp: LZ) I've been in since before the blog and I already have a decent unrealized gain. I'll include it at current prices for the purpose of the model portfolio though.

1. The first one is Varian Semiconductor(VSEA). VSEA is being bought out by AMAT for $63.00 cash. With VSEA currently trading around $61.00 I can get approximately $1.55 by selling the November $60 puts. With approximately $1300 of margin requirement, this comes out to about %11.92 in just 3 months.
• Sell to Open: One(1) VSEA Nov 19 2011 60.0 Put @ 1.55
2. Next up is Kinetic Concepts(KCI). KCI is being acquired by a private group called APAX Partners for $68.50 cash. KCI is trading around $67.00 and I got $1.50 for the December $67.50 puts. The return on margin on this trade is about %9.4 in 4 months.
• Sell to Open: One(1) KCI Dec 17 2011 67.5 Put @ 1.5
3. Finally, Lubrizol Corporation(LZ) is being acquired by Berkshire Hathaway for $135 in cash. LZ trades just under $135 right now and the September 135 puts are going for about $0.65. I originally got $1.45 for this trade a few months back. If I was entering it for the first time today, I'd probably go with the December options to get a few extra bucks. The return on this one is also smaller because of the unrealized gain I already have on it, but with about $2800 in margin requirements the model portfolio will be %2.3 in just over a month.
• Sell to Open: One(1) LZ Sep 17 2011 135.0 Put @ $0.65

Some of these trades may need to get rolled out a month or two depending on when the buyouts are finalized(especially the LZ trade), but that shouldn't be an issue.

The Numbers

• Cash: +$370
• Short Option: -$470
• Margin: -$5630

VSEA closed out
KCI closed out