Options Corner
Taking the current market backdrop and linking in with one of our previous Conviction Buy recommendations (which has not played out well so far, it has to be said) an ideal candidate for a Strangle play is Research in Motion. Research in Motion’s outcome is now very binary - either they will burn through their cash over the next 2 years and die a slow death or they will be bought. This type of scenario is a classic Strangle play and so you could construct a combined January 2013 (and so plenty of time to run) $10 Call & a Jan $5 Put strategy for a net cost of $1.
If Research in Motion get taken out, they are likely to go for towards the $15-20 price range, and if they continue lower, then the end game will be sub $5. A $1 cost with break-evens of $4 & $11 looks a decent trade to us and also hedges a long stock position. An upside move on a bid could yield 4 - 9 times your money. Below is a chart of RIM with the expected Strangle range underlying this recommendation.
Research in Motion weekly chart
Next month we will take a look at “ratio spreads” and how you can construct a strategy that has almost no risk if you enter it wisely and then results in a potentially explosive pay-off!
56 www.financial-spread-betting.com | July 2012