Stock Markets Exposed

Whats the Best Stock Options Strategy to Speculate in M&A?

Say there's a stock, ABC, that you think might get bought out for a hefty premium. Whats the best option strategy to employ? I am not interested in making small gains. I.e., if ABC is a $100 stock and it moves up $3, I dont want to pocket any gains. What I want is the ability to stay in the trade and hopefully participate on the big upside. I'm pretty sure theres an option strategy that will allow me to do this. Any ideas?

Public Comments

1. Well, due to the strength in the Steel sector There seems to a consensus that the Aluminum sector will follow. That's much in the same sense that Platinum moves follow Silver. Alcoa is not only the strongest representative in the Aluminum sector, but a takeover candidate as well. So the logical resoning goes, and depends largely on the going rate of 'out-of-the-money" AA Calls, buy 100 shares of AA and load up on cheap Options 25% above the going rate for December. It won't work in Oil, that sector is plenty crowded, but once again, depending on prices, it might work in Aluminum. The worst case scenario is you lose all your Option money, but if the recent Steel sector strength is any indication, the stock of AA should perform better than any T-Bills.
2. The "best" strategy depends upon a number of things you did not specify, including: What is your risk tolerance? How good are you are managing an options position after you have opened it? Is the implied volatility of the options (and/or the stock price) already elevated in anticipation of a possible merger? Depending on the answers, some possible strategies include A call backspread (aka a call reverse ratio spread) This consists of selling some calls with a lower strike price and using the funds from the sale to buy a larger number of calls with a higher strike price. Backspreads are usually opened for a credit. A synthetic long stock position. This consists of selling puts and buying an equal number of calls with the same strike price and expiraiton. This provides a lot of leverage, leading to large gains or losses if the stock price moves significantly. Buying out of the money calls This strategy is most appropriate if implied volatility is too low (i.e., lower than the amount of volatility you expect) and you want to limit your potential losses to the amount of your original investment. WARNING: All of these strategies can be hazardous to your financial health even if you understand options well, and they may be deadly if you do not.