Yesterday, Staples (SPLS) launched an offer for the acquisition of Corporate Express (CXP) for EUR 8.00 per ordinary share. Shareholders can submit their shares until June 27th. Staples also made an offer for Corporate Express’ preference shares and subordinated convertible bonds due 2010. The most important condition for making the offer unconditional is acceptance of at least 75% of ordinary shares.

Many investors still perceive options as instruments which are used for outright speculation on the direction of a certain underlying value, with the opportunity to make fast and large profits, but also the chance to lose the initial investment as fast, or even faster. This is particularly the case when an investor weighs the alternative outcomes between, for example, an investment of $1,000 in 20 Wal-Mart (WMT) shares or the purchase for an equivalent amount of 4 call options expiring in April with an exercise price of $50, which currently have a price of about $2.50 per option.

When on the expiration date the share price of Wal-Mart has increased to $55, profit on the shares position will be $100, while the options will have doubled in value. But if the share price has not increased to a level above $50, the whole investment in options will be lost.

Imagine you go to a casino and spot a big bucket filled with 100 balls. There are 51 red balls and 49 blue balls. Next to the bucket there is a sign which informs you that you can guess the color of a randomly drawn ball for $1. If you are right, you will receive $2, but if you are wrong you will lose your bet. A rational investor will take a seat next to this bucket and will not leave anymore. By consistently betting on a red ball being drawn, he can calculate a 51% chance of achieving a return of $2 and a 49% chance of a return of $0, which gives an expected return of $1.02 for an investment of $1.

On January 11^th, Bank of America (BAC) announced a definitive agreement to purchase Countrywide Financial (CFC) in an all-stock transaction valued at approximately $4 billion. Under the terms of the agreement, shareholders of Countrywide will receive 0.1822 shares of Bank of America for each share in Countrywide. At the time of announcement, parties expected the deal to be completed in the third quarter of 2008.

This merger agreement followed an investment by Bank of America in Countrywide, announced on August 22^nd of last year, in which Bank of America made a $2 billion strategic investment in Countrywide. This was done through a 7.25% non-voting convertible preferred security, with a conversion price of $18 per share. With the merger announcement almost five months later, Countrywide is valued at just over $7 per share.

Since the second half of July 2007 we have experienced increased volatility in worldwide equity markets when the credit crisis emerged to the surface with full force. Equity prices dropped sharply until the middle of August, followed by a strong rebound that lasted until October when the highest level of the S&P 500 index was reached. Since then, prices have been dropping with some attempts to positive corrections. This continued landscape of uncertainty is posing challenges for every style of investor. Being right is already difficult enough, but the cost of being wrong can be so much higher with high levels of volatility in the market.

Every financial landscape however also lends itself to new opportunities and strategies, and in this article I will describe an option strategy that may occasionally work very well in the market environment that we are experiencing these days. I am referring to the possibility of taking a long position in a so called straddle or strangle on an index. For readers who are less familiar with option terminology, a straddle is an option combination of both a call option and a put option where the strike price and maturity date are the same. A strangle is a combination where the strike price of the call option is higher than the strike price of the put option.

Yesterday, Staples (SPLS) informed us that they have made a proposal to acquire all ordinary shares of Corporate Express (CXP) for a price per share of EUR 7.25, representing a total enterprise value of approximately EUR 2.5 billion. The proposal has not been discussed with Corporate Express shareholders and management and the letter to Mr. Ventress, the CEO of Corporate Express, was included in the announcement. From the letter it is clear that Staples has already made some earlier attempts to engage in discussions with Corporate Express, and it seems that Corporate Express has resolutely refused discussions about an acquisition.

In the Netherlands there is heated speculation about when Staples (SPLS) will make an offer for Corporate Express (CXP), the Amsterdam based office products supplier, and how high the offer will be.