2 Ways to Trade a Potential Massey Buyout

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Massey Energy Company (NYSE: MEE) rose Tuesday morning after it was reported last night that the coal mining company was exploring strategic alternatives, including a possible sale. The deadly mine blast in West Virginia in April has kept a cloud over the company and the stock relative to its peers.

But MEE traded as high as $39 this morning, and is now around $37.50 after the company said it would not comment on specific opportunities. The stock’s 52-week trading range is $25.85 to $54.80.

So let’s look at bullish options trades based upon a possible merger. We have seen over 1,900 of the MEE Nov 40 Calls change hands versus an open interest of only 662 contracts. The call option volume in the December and January expiration dates are elevated as well, but is not off the charts yet.

Keep in mind that MEE has risen from $27 in August to the current $37 handle. Given that the November contracts only have about one month of time value, traders who want to speculate on Massey should wait for a small pullback and go out to the December or even January contracts to allow enough time for the story to play out

Another strategy would be to write out-of-the-money put options. The problem there is the nearly unlimited risk if the company has another accident or if the shares move down sharply after the company reports earnings next week. So you need to be aware of the risk associated with naked put options before making a trade like this.

Thomson Reuters has a mean analyst price target of $42.41 for MEE. Currently, the November contracts are signaling a possible deal value from $40.50 to $41.50, and the December contracts are just above $41 to $42 for implied deal values. Those are one-sided only, and the approximate figures will change as the price of MEE moves.

Private equity and corporate mergers and acquisitions are making a comeback largely due to companies’ ability to borrow money for cheaper than ever. It’s anyone’s guess whether Massey will get a deal. Even after today’s move up, its market cap is less than $4 billion. For larger corporations, that may hardly represent a line item. That is also right in the range of many private firms in the $2 billion to $5 billion deal range.

Follow Jon Ogg on Twitter @jonogg.


Article printed from InvestorPlace Media, https://investorplace.com/2010/10/mee-options-to-play-possible-massey-energy-company-buyout/.

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