Money is to be made in this merger mania if you have your chips on the right stocks. 2015 has been an epic year for takeovers as companies have cash, and low-interest rates to get more cash, to buy that growth they are missing organically.
Let me show you how to put some chips down for big payoffs without a lot of dollar risk…
TAKEOVER HACK
Market money is being put to work to make more money. Huge corporate cash reserves do little sitting on balance sheets earning tiny interest payments. Earnings growth is hard to come by for companies in this environment.
The easiest way to increase EPS is to just buy it. Mergers and acquisitions have become commonplace with low-interest rates as a way to expand.
From beer to pharma it seems no industry is immune to a buyout boost. Typically the buyer pays a major premium over the share price of the purchased company.
BUYOUT SPECULATION HACK
Placing low-cost chips using options can position in possible buyout plays. Instead of using the sometimes overvalued, whisper rumors, and mathematically low probability out of the money options a spread can be created.
EX. STOCK is trading at $14
Buy a four month $15 call @2.50 expecting a takeover bid in next 120 days
Sell a one year and three month $20 call $2.75
NET CREDIT $0.25
Buyout at $17 would make the spread worth $3 plus original $0.25 credit for $3.25 profit.
In the event of a buy-out both options should immediately reflect the deal price. The time value of the option will evaporate because no more opportunity will exist if agreement is consummated.
If nothing happens in the next 120 days and prices are below $15 the one-year option will need to be covered and bought back to close out exposure.
This option spread technique lowers the cost to position for a takeover where you actually get paid to play for profits.
