The market may be on edge with a weaker dollar and higher commodities, but investors looking for some specific opportunities will find no shortage. In this article, we’ll take a look at playing a potential buyout, a possible short candidate and an analyst recommended pairs trade, while using options to leverage the positions and lower the capital outlay.
Martha Stewart Could be Worth $10/Share
Martha Stewart Living Omnimedia Inc. (MSO), an integrated media and merchandising company that provides consumers with lifestyle content, could be worth $10.00 per share in asset value, according to Noble Financial. The analyst also believes that the firm has been approached by as many as three companies seeking to buy all or parts of the company.
With expectations of a potential bid, but concerns the firm may not want to pursue a sale, investors may want to look at a bet on volatility using a straddle options strategy. This position can be established by purchasing one 5 Dec ’11 call for $0.60 and one 5 Dec ’11 put for $1.05, which will enable the investor to profit from a move in either direction beyond the premium cost of $1.65 per share.
MedAssets Departure Could Signal Short
MedAssets Inc. (MDAS), a provider of technology-enabled products and services designed for the healthcare industry, recently announced the departure of Patrick Ryan from its board and management team. After negotiating a two-year contract with him just two months ago, Piper Jaffray analysts suggested that the move could be a red flag, and lowered its price target to $11.00 per share.
With the departure being only a mild red flag, investors may want to consider a less bearish strategy than shorting. By purchasing the 17.50 Dec ’11 puts for $1.35 per contract, investors can profit from the downside for a minimal investment. An even less bearish strategy could involve writing put options at shorter expiration dates in a diagonal spread to earn premium payments (if volatility makes it worthwhile).
Eaton/Blackrock Pairs Trade Could Pay Off
Eaton Vance Corp (EV), a provider of fund management and counseling services to individuals and institutions, could make for a good pairs trade with Blackrock Inc. (BLK), according to Citigroup analysts. The analyst firm expects EV shares to remain under pressure due to deteriorating flow prospects and high investor expectations, while it remains bullish on BLK’s long-term outlook.
While a standard pairs trade can be established rather easily, purchasing and shorting actual shares can prove quite expensive. As a result, investors may want to consider using medium-term options and creating a pairs trade by purchasing 30 Nov ’11 puts in EV for $2.05 along with 200 Oct ’11 calls in BLK for $12.70. Note that investors should purchase them in a ratio of about 6:1 to make it a pairs trade.