SLM Corporation (NYSE: SLM), more commonly known as Sallie Mae, is one of the former financial powerhouses that has been gutted. But unlike some of the government-sponsored enterprises that seem to be on very expensive life support despite a likely death sentence, Sally appears to have value in the eyes of some.
Last week came word that Jonathon Jacobson, who is the founder of hedge fund Highfields Capital Management, said at a New York conference that SLM should be worth about $15 to $25 per share.
The reason behind his call, other than being long SLM, of course, is that the shakeout seen in the student loan industry did not entirely kill the company. The strong management team in place there was noted as being able to profitably acquire the servicing rights of other student loans as they are being sold off by many companies that are voluntarily exiting or being forced out of the student loan business now that Uncle Sam has effectively taken it over.
SLM has sold off with the broad market. After having fallen from $13 down to almost $10, the news last week did take shares back up to almost $11, which is where it is trading today.
You could simply get long the stock here for the turnaround and continued restructuring. But if you want to play options, you should look out a bit further than June or July. Buying those expiration months does not leave enough time when we are going into what are historically the slower months of the year, and during a time of market challenges as well.
At 90 cents, the SLM Oct 13 Calls seem to offer the sweet spot of premium versus time value, with an actual chance of the strike price getting hit. The idea here is that if this stock does recover to where it was in the last 60 days, then the trade will be a home run.
Considering that SLM trades more than 5 million shares on average per day, the options volume and open interest seems a bit light.
But if the stock recovers in the next 45 days, the value of those options could go from 90 cents to $1.50 or $1.70. And if the stock lingers here for the next 45 days, the value on the current price should still be about 70 cents.
The reason for the 45-day period is that it coincides with the July expiration date. After that roll occurs, then the decline in premium due to time value erosion will come into play.
But a theoretical downside of 15 cents to 20 cents versus a possible upside of 60 cents to 80 cents makes this a pretty solid trade.
Follow Jon Ogg on Twitter @jonogg.
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