The Volatility Trader
105 W. Monument Street
Baltimore, MD 21201
Monday, November 20, 2006
Email – #222
Blindsided by the Buyout
Dear Volatility Trader Subscriber,
Over the weekend, news surfaced that Equity Office Properties (NYSE: EOP) is going to go private, following a $36 billion deal with Blackstone Group. This is not good news for our put position.
The contracts will most likely expire worthless… if a bid surfaces to get out, hit it.
In the meantime, with no available bid to exit the trade, we will hold the position in the portfolio until expiration… just in case the deal falls apart (which would take a miracle since this would cause the stock to take a huge hit). As of now, though, the deal is locked in, and we will most likely take the hit on the options.
As I was thinking to myself this morning, at least we’re not short the stock – and that’s why I like options. The stock gapped up, and we are going to lose the value of the option.
But, when our position sizes are well averaged for the size of each of our portfolios, our position risk is limited to the total invested in the position – which, in many cases, can be significantly less than simply owning, or having shorted, the stock itself.
New Trade Alert!
Approaching Black Friday, we will capitalize on retail momentum for a quick profit. Buy the December $37.50 Home Depot calls (HD-LU) for no more than $1.45. We will close the position, if the stock falls below the strike.
In the meantime, Home Depot is trading just above the 200-DMA at $37.67, with the 50-DMA also headed upwards from underneath the 200-DMA… a bullish technical event.
What’s more, the stock has been beaten down as a non-favorite of Jim Cramer. The company remains solid with a 13 P/E, trades at a very optimistic 0.88 times sales, and has a low PEG of 1.05.
Fundamentally, Home Depot is sound, and will likely be a ‘come-from-behind’ play with the Dow’s recent strength.
Exit is everything,
Mark Whistler
