NASDAQ OMX Group: NDAQ $20.85 Sep. 4, 2009
52-week range: $14.96 (Nov. 21, 2008) - $38.81 (Sep. 19, 2008)
Nasdaq OMX is an equities and derivatives exchange with primary operations in the United States and the Nordic and Baltic regions of Europe. The company makes most of its revenues from transaction execution, market data, listing fees, and market technology, but also has related business lines such as investor relations and executive insurance.
NASDAQ OMX is one of the few decent quality stocks that have failed to advance from last March’s share price when the market bottomed. As such I see opportunity for a buy and write combination that can show excellent returns even if these shares just continue to mark time.
Here are NDAQ’s per share numbers from continuing operations as reported by
Value Line:
Year ........ Sales ........ C/F ......... EPS ......... B/V ....... Avg. P/E
2005 ....... 10.58 ...... 1.51 ........ 0.57 ........ 1.90 ....... 36.1x
2006 ....... 14.76 ...... 1.51 ........ 0.75 ....... 12.98 ...... 45.9x
2007 ....... 17.55 ...... 1.95 ........ 1.59 ....... 15.90 ...... 22.1x
2008 ....... 18.07 ...... 2.48 ........ 2.01 ....... 21.01 ...... 16.4x
2009* ..... 19.30 ...... 2.55 ........ 1.85 ....... 23.00 ...... 12.5x
* 2009 numbers include consensus estimates for second half.
Zacks sees $2.06 for 2010 making the multiple on NDAQ about 11.3x this year’s and 10.1x next year’s estimates. At that level I see little risk of a major decline.
Here’s a nice 16.5 month play that looks good to me right now.
............................................................... Cash Outlay .............. Cash Inflow
Buy 1000 NDAQ @ $20.85 /share .................. $20,850
Sell 10 Jan. 2011 $22.50 Calls @$3.80 /share .................................. $3,800
Sell 10 Jan. 2011 $20 Puts @ $3.80 /share ..................................... $3,800
Net Cash Out-of-Pocket ............................... $13,250
If NDAQ shares rise to $22.50 or higher (+ 8%) by Jan. 21, 2011:
• The $22.50 Calls will be exercised.
• You will sell your shares for $22,500.
• The $20 puts will expire worthless.
• You will have no further option obligations.
• You will end up with no shares and $22,500 in cash.
That’s a best-case scenario profit of $9,250/$13,250 = 69.8%
achieved on shares which only needed to rise by 8% from trade inception.
What’s the return if the shares don’t move at all?
If NDAQ shares are unchanged at $20.85 on Jan. 21, 2011:
• The $22.50 calls will expire worthless.
• The $20 puts will expire worthless.
• You will still hold 1000 shares of NDAQ worth $20,850.
• You will have no further option obligations.
That’s a static return of $7,650/$13,250 = 57%
achieved on shares that did not move from the trade’s inception date.
What’s the risk?
If NDAQ shares are below $20 on Jan. 21, 2011:
• The $22.50 calls will expire worthless.
• The $20 puts will be exercised.
• You will be forced to buy another 1000 NDAQ shares.
• You will need to lay out an additional $20,000 in cash.
• You will have no further option obligations.
• You will end up with 2000 shares of NDAQ.
What’s the break-even point on the whole trade?
On the original 1000 shares it’s their $20.85 /share purchase price
less the $3.80 /share cal premium = $17.25 /share.
On the ‘put’ shares it’s the $20 strike price less the $3.60 /share
put premium = $16.20 /share.
Your overall break-even would be $16.73 /share.
NDAQ shares could drop by $4.12 /share (-19.7%) without
causing a loss on this trade.
Summary:
Nasdaq OMX shares look cheap by all historical valuation metrics. Value Line uses an 18 multiple in calculating their 3-5 year target price. Morningstar sees present day ‘fair value’ as $28. Standard and Poors carries a 12-month target price of $25.
If NDAQ rises by 8% or better by January 21, 2011 this combination play will return almost 70% cash-on-cash.
If NDAQ merely stays unchanged through expiration date this combination will return 57% cash-on-cash.
If we’re wrong we have a built in margin of safety of 19.7% as NDAQ shares could fall to as low as $16.73 without causing harm. Any drop of less than that would result in at least a small gain.
Disclosure: Author is long NDAQ shares and short NDAQ options.
52-week range: $14.96 (Nov. 21, 2008) - $38.81 (Sep. 19, 2008)
Nasdaq OMX is an equities and derivatives exchange with primary operations in the United States and the Nordic and Baltic regions of Europe. The company makes most of its revenues from transaction execution, market data, listing fees, and market technology, but also has related business lines such as investor relations and executive insurance.
NASDAQ OMX is one of the few decent quality stocks that have failed to advance from last March’s share price when the market bottomed. As such I see opportunity for a buy and write combination that can show excellent returns even if these shares just continue to mark time.
Here are NDAQ’s per share numbers from continuing operations as reported by
Value Line:
Year ........ Sales ........ C/F ......... EPS ......... B/V ....... Avg. P/E
2005 ....... 10.58 ...... 1.51 ........ 0.57 ........ 1.90 ....... 36.1x
2006 ....... 14.76 ...... 1.51 ........ 0.75 ....... 12.98 ...... 45.9x
2007 ....... 17.55 ...... 1.95 ........ 1.59 ....... 15.90 ...... 22.1x
2008 ....... 18.07 ...... 2.48 ........ 2.01 ....... 21.01 ...... 16.4x
2009* ..... 19.30 ...... 2.55 ........ 1.85 ....... 23.00 ...... 12.5x
* 2009 numbers include consensus estimates for second half.
Zacks sees $2.06 for 2010 making the multiple on NDAQ about 11.3x this year’s and 10.1x next year’s estimates. At that level I see little risk of a major decline.
Here’s a nice 16.5 month play that looks good to me right now.
............................................................... Cash Outlay .............. Cash Inflow
Buy 1000 NDAQ @ $20.85 /share .................. $20,850
Sell 10 Jan. 2011 $22.50 Calls @$3.80 /share .................................. $3,800
Sell 10 Jan. 2011 $20 Puts @ $3.80 /share ..................................... $3,800
Net Cash Out-of-Pocket ............................... $13,250
If NDAQ shares rise to $22.50 or higher (+ 8%) by Jan. 21, 2011:
• The $22.50 Calls will be exercised.
• You will sell your shares for $22,500.
• The $20 puts will expire worthless.
• You will have no further option obligations.
• You will end up with no shares and $22,500 in cash.
That’s a best-case scenario profit of $9,250/$13,250 = 69.8%
achieved on shares which only needed to rise by 8% from trade inception.
What’s the return if the shares don’t move at all?
If NDAQ shares are unchanged at $20.85 on Jan. 21, 2011:
• The $22.50 calls will expire worthless.
• The $20 puts will expire worthless.
• You will still hold 1000 shares of NDAQ worth $20,850.
• You will have no further option obligations.
That’s a static return of $7,650/$13,250 = 57%
achieved on shares that did not move from the trade’s inception date.
What’s the risk?
If NDAQ shares are below $20 on Jan. 21, 2011:
• The $22.50 calls will expire worthless.
• The $20 puts will be exercised.
• You will be forced to buy another 1000 NDAQ shares.
• You will need to lay out an additional $20,000 in cash.
• You will have no further option obligations.
• You will end up with 2000 shares of NDAQ.
What’s the break-even point on the whole trade?
On the original 1000 shares it’s their $20.85 /share purchase price
less the $3.80 /share cal premium = $17.25 /share.
On the ‘put’ shares it’s the $20 strike price less the $3.60 /share
put premium = $16.20 /share.
Your overall break-even would be $16.73 /share.
NDAQ shares could drop by $4.12 /share (-19.7%) without
causing a loss on this trade.
Summary:
Nasdaq OMX shares look cheap by all historical valuation metrics. Value Line uses an 18 multiple in calculating their 3-5 year target price. Morningstar sees present day ‘fair value’ as $28. Standard and Poors carries a 12-month target price of $25.
If NDAQ rises by 8% or better by January 21, 2011 this combination play will return almost 70% cash-on-cash.
If NDAQ merely stays unchanged through expiration date this combination will return 57% cash-on-cash.
If we’re wrong we have a built in margin of safety of 19.7% as NDAQ shares could fall to as low as $16.73 without causing harm. Any drop of less than that would result in at least a small gain.
Disclosure: Author is long NDAQ shares and short NDAQ options.
