InteractiveBrokers [NDQ:IBKR - $17.55] is up about 0.72% while virtually everything else is down today.
I’ve heard rumors that IBKR could be the target of a privatization by its founder and the price action in the calls seems to give some credence to this possibility.
January $20 and $22.50 calls have actaully traded at $1.05 and $0.45 already and with a bid/ask spread of $0.15/$0.30 on the so-far untraded January $25 calls.
The shares seem to have limited downside as they’ve already reflected some pretty poor recent quarterly results without suffering any damage.
A nice seven-month play…
Cash Outlay | Cash Inflow | |
Buy 1000 IBKR @ $17.55 /share | $17,550 | |
Sell 10 IBKR Dec. $17.50 calls @ $1.65 /share | $1,650 | |
Sell 10 IBKR Dec. $17.50 puts @ $1.60 /share | $1,600 | |
Net Cash Out-of-Pocket | $14,300 |
If IBKR merely holds above $17.50 through the Dec. 18, 2010 expiration date:
· The $17.50 calls will be exercised.
· You will sell your shares for $17,500.
· The $17.50 puts will expire worthless.
· You will have no further option obligations.
· You will end up with no shares and $17,500 in cash.
This best-case scenario profit would be $17,500 - $14!2C300 = $3,200 for the 7.>5 months throug` expiration date.
$3,200/$14,300 = 22.3% cash-on-cash or about 37% annualized achieved on shares that
ü Go up.
ü Stay unchanged.
ü Hold at $17.50 or above.
What’s the risk?
If IBKR falls below $17.50 on Dec. 18, 2010:
· The $17.50 calls will expire worthless.
· The $17.50 puts will be exercised.
· You’ll be forced to buy another 1000 IBKR shares.
· You’ll need to lay out an additional $17,500 in cash.
· You’ll end up with 2000 IBKR shares.
· You’ll have no further option obligations.
What’s the break-even on the whole trade?
On the original 1000 shares it’s the $17.55 purchase price less the $1.65 call premium = $15.90 /share.
On the ‘put’ shares it’s the $17.50 strike price less the $1.60 /share put premium = $15.90 /share.
Your overall break-even would be $15.90 or (-9.4%) below the trade origination price of $17.55 /share.
Dr. Paul Price – May 14, 2010
www.BeatingBuffett.com
Disclosure: Author is long IBKR shares and short IBKR options.
