Possible NYSE Euronext Options Trade

NYSE Euronext: (NYX) - April 29, 2009: $21.80 [9:45 EST]
52-week range: $14.52 (Jan. 23, 2009) - $76.71 (May 5, 2008)
Dividend = $0.30 quarterly = 5.69% current yield.

* NYSE Euronext is a diverse exchange group. The Company offers a range of products and services in cash equities, futures, options, swaps, exchange-traded products, bonds, market data, and commercial technology solutions, all designed to meet the evolving needs of issuers, investors, financial institutions and market participants. The Company is also a liquid equities exchange group. The Company operates in a range of markets, which include New York Stock Exchange (NYSE), Euronext, NYSE Liffe, NYSE Arca, NYSE Alternext, NYSE Amex and NYSE Liffe US. In addition to its markets, through NYSE Technologies (NYXT), the Company operates a globally distributed connectivity network that supports trading on its markets, and also provides trading and information technology solutions to third-party financial markets and other financial institutions.

* Company description by MSN MoneyCentral

When the markets were hot in 2006 and 2007 these shares traded as high as $112 and $109.50 with each year’s respective low at $48.60 and $64.30. The late 2008 through March 2009 extreme sell-off drove NYX to a panic bottom of $14.52 /share in January. The shares wre at $21.80 Tuesday just after the opening.

Despite the negative market sentiment sales per share hit a record last year and are expected to be higher again in 2009. Zacks is carrying estimates of $1.86 and $2.20 for 2009 and 2010.

If those projections prove to be accurate NYX is now offered at P/Es of
< 11.8x and under 10x earnings - by far their lowest multiples since the NYSE first came public.

The 5.69% current yield is well above CD and T-Bond rates and looks to be sustainable. Morningstar rates NYX shares 4-stars (out of 5) and lists their ‘fair value’ estimate at $41/share.

Certainly, these shares have big upside potential. But suppose you’re not completely sold on that happening right away. Here’s a combination play that could pay off huge and doesn’t count on anything more than the shares just ‘not getting worse’.

______________________... __________Outlay.. ..... Cash Inflow
Buy 1000 NYX @$22.04_______________$21,800
Sell 10 Jan. 2011 $22.50 calls @ $5.50 ____________$5,500..
Sell 10 Jan. 2011 $22.50 puts @$7.40_____________$7,400
Net Cash Out-of-Pocket _______________$8,900

If NYX shares merely go above $22.50 [up 3.2% from the current price] by expiration date in January 2011:

Your $22.50 Calls will be exercised.
You will sell your shares for $22,500.
Your $22.50 puts will expire worthless.
You will likely have collected $2,100 in dividends.
You will have no further option obligations.

You will hold no shares and $24,600 cash for your original cash
investment of just $8,900.

That’s a best-case scenario profit of $15,700 on $8,900 = 176% achieved over just about 21 months on shares which would only need to rise 3.2% from their purchase price.

What’s the risk?

If NYX shares remain below $22.50 between now and their option expiration date:

Your $22.50 calls will expire worthless.
Your $22.50 puts will be exercised.
You will be forced to buy another 1000 shares of NYX and to
lay out an additional $22,500 cash.
You will likely have collected $2,100 in dividends.
You will have no further option obligations.

You will end up owning 2000 shares of NYX.

What’s the break-even point on the whole trade?

On the original shares it’s their $21.80 purchase price less the
$5.50 /share call premium = $16.30 /share.

On the ‘put’ shares it’s the $22.50 strike price less the
$7.40 /share put premium = $15.10 /share.

Your average cost is the average of $16.30 + $15.10 = $15.70 /share.

If you count the $2100 in yield that was probably received it would lower
that break-even to $14.65 /share.

That’s close to the panic low of $14.52 and about 7.9 times expected 2009 earnings. If you don’t believe this company is ‘going out of business’ I think it’s a good bet this will turn out to be a profitable trade.

Upside = 176% total return in 21 months.
Break-even = $7.15 below today’s price or (- 32.8%).
…….. Anything less than a 32% loss will leave you in profit.

Disclosure: Author is long NYX shares and short NYX options.

Comments

[Ed S:]

Hi Paul
Thanks for your articles. As an alternative, have you ever considered calendar or diagonal spreads to synthesise a similar result without the downside risk if the stock drops significantly. e.g. in this case buy the Jan'10 $20 put and sell the May'09 $21 put, rolling this position forward.

Advantages of your strategy
- collect dividends
- lower transaction costs
- profit maximised if stock closes anywhere above strike

Advantage of spread strategy
- lower initial capital requirements and downside risk.

I have had some success with the latter strategy ... the cash / cash returns can be quite good eg 75%+ in 9-12 months.

Apr 29 04:04 AM

[SJD:]

If a stock stays range bound or volatility drops, the covered combination strategy generates a lot of cash income by basically taking money out of the option market maker's pocket and putting it into yours.

Apr 29 11:05 AM

[Paul Price:]

SJD,

Very true, and if the shares go way up you make the best-case return which is pretty spectacular.

Apr 29 11:55 AM

[Stez:]

Some really interesting ideas from both you and Ed.

With regard the dividend is this a relatively safe one?

Apr 30 06:28 AM

[Paul Price:]

NYSE GROUP (NYX): Q1 EPS of $0.43 beats by $0.04. Revenue of $1.1B (+0.2%) in-line. (PR)

Apr 30 08:31 AM