New at selling options Is this play a smart or dumb move

Discussion in 'Options' started by Busta, Jan 26, 2012.

  1. Busta

    Busta

    Have been interested in Silver stock for a while now.
    Just found out that Pan American Silver (PAAS) is buying out Minefinders (MFN)
    As part of the agreement, Minefinders stockholders will have the choice (from what I am reading) of receiving 15.60 Canadian for each Minefinders share in cash. Pan American Silver is supposed to close the deal at the end of March.

    I was looking at selling an MFN put option contract (or many)
    There is an August put option of 16.00 carrying a premium of roughly 2.65 per share.

    Can someone give me a downside of selling these contracts, as Minefinders stock will be absorbed at 15.60 per share in cash at end of March?
    Only thing I can see going wrong is that Minefinders isnt acquired (closed on) by Pan American Silver and I have to buy the stock at 16.00 per share, but will have 2.65 per share as a buffer representing a purchase at roughly 13.35 per share. Minefinders is trading at 14.02 per share today.
    Am i missing anything??
    Here is the link to the terms of the acquisition. Much appreciatioan to any and all replies.

    http://www.minefinders.com/Media-Ce...ally-Diversified-Silver-Producer/default.aspx
     
  2. A quick look at your link indicates that there are 3 elections. For the all cash option, your numbers make sense. For the two involving shares of PAAS, you may have some interim risk with that. I don't know what, if any time exposure you have from election to completion.
     
  3. rosy2

    rosy2

    i like to sell front :p month options if its not a vol play. look at how time decay works
     
  4. Dont know if you are missing anything but there is no particular edge to these specific aug 16 options. in general, since this news is not something only you know about you should assume the option prices are fair and the market has already taken this piece of information into account.

    If you are comfortable with holding this stock at 13.35 like you said (since thats the worst case); i would look at selling say march 14 puts for 60 cents. Your cost basis will be the same and you get a chance to do 3-4 rolls - and time premium will come out faster. But if you think the stock will quickly move to 16 and will not let you sell a lot more premium then selling 16put right now would be the right choice (but most likely if that were the case it would already be trading there.. there must be some risk that is keeping it down here; so who knows.. it might stay here for longer than you think :) in which case you are better off with selling front month and rolling it).

    Either way do it only if you are willing to hold the stock if put to you and can manage it (dont do it too big or you know what happens to all sure shot trades :) ).

    ps: i see that in the post title you indicate you are new to option selling. in that case do it very very small; better assume the market place is efficient.

    -gariki
     
  5. Also, consider an automatic stop loss by purchasing the lower or out of-the-money puts with the same or further out expiration.
    This will "cap" your loss and reduce margin requirements considerably.
    Yes, of course, your potential profits are reduced.