One of the best trades using naked puts I ever did was when AT&T Inc. (T) bought out DirecTV. The former bid $95 per share for the latter.
There was all this unfounded skepticism that the deal would be blocked by the federal government, but I knew it wouldn’t, and my sources confirmed it. So I sold naked puts one month after another for over a year against DirecTV.
If the stock got put to me, I didn’t care because I knew I’d get $95 per share for it, or something close to it because of the deal terms, later on. So I reaped premium after premium for over a year.
There are a few M&A deals in play now that you can use the same strategy with. The trick is that these deals might not go through, and you could have a stock put to you at a price much higher than where it was before the deal was made.
Still, the stock may have a floor because it’s obvious that’s a value that a buyer has put on the company.
Naked Puts: Starz (STRZA)
Starz (STRZA) was finally bought out, after years of speculation, although anyone who follows John Malone knew that this deal would happen eventually.
The deal has STRZA getting taken out at over $30 per share by Lions Gate Entertainment Corp. (USA) (LGF). John Malone deals do not fail, there wasn’t much of a premium attached to this deal and STRZA is a fine media company to own even if the deal fails and the stock gets put to you.
Thus, with STRZA trading at $30.36, you could sell the Oct $30 naked puts for about $1.40 if you want to go with one trade. But you could sell the August $30 naked puts for about 80 cents, see what happens, and then sell the September puts and then the October puts, and probably earn more in the aggregate.
Or you could sell all three up front, with the September naked puts going for about $1.10, and pocket $3.40 in total.
Naked Puts: Cash America International Inc (CSH)
Cash America International Inc (CSH) has probably reported earnings, along with its buyer First Cash Financial Services Inc (FCFS) by the time you read this. This is a stock-for-stock deal, so while the stocks are trading right about where they were when the deal was announced (and this deal will certainly go through), the issue is that whatever happens to FCFS stock will happen to CSH.
At the close Wednesday, CSH traded at $42.84. Were there to be no change after earnings, you could sell the September $40 naked puts for $1.20. So that’s a 3% return to start. Second, if FCFS stock falls and takes CSH with it, and CSH stock is put to you, don’t worry. You’ll own the largest pawnshop owner in both the U.S. and in Mexico.
Post-earnings, see where the stock settles in, and consider selling the options at the nearest strike price.
Naked Puts: Carmike Cinemas, Inc. (CKEC)
The riskiest play this week is with Carmike Cinemas, Inc. (CKEC), with was initially proffered a buyout at $30 per share. CKEC refused, and prospective buyer AMC Entertainment Holdings Inc (AMC) boosted it to $33 per share, and insists that this is its last, best offer.
Well, the stock is at $30.14 as of Wednesday’s close. The market is apparently saying that it does not think CKEC will accept this deal. Other reports say the company wants $40 per share.
The problem here is that CKEC was trading at $22 before the offer.
You have two ways to look at this. If AMC think CKEC is worth $33, then the stock should trade around that even if the deal falls apart, whether or not another buyer steps in.
You can sell the December $30 puts for $1.45, but just know the stock could fall back to $22. I don’t know why it would, and I think another buyer might step up, but that is the risk.
As of this writing, Lawrence Meyers has sold naked puts against STRZA.