ANR, A Covered Call Case

Published on July 28, 2008

ANR, A Covered Call Case

July 28, 2008

The Cleveland-based company (CLF) announced its bid for Alpha (ANR) on July 16 in which Abingdon, Va.-based Alpha shareholders would receive 0.95 Cleveland-Cliffs (CLF) shares and $22.23 in cash for each share. The companies pegged the deal at $10 billion the day it was announced. Based on the company’s 70.3 million outstanding shares at April 23, the deal is valued at $8 billion currently. Since the deal is a little bit rocky and is surrounded by uncertainty, the share prices are rocked as well. Currently ANR is selling cheap compared to the buyout prices.

One may create multiple strategies to benefit from M&A play, I am planning for a coverall call strategy on ANR, details of which are here-

  • Underlying ANR: @ $88.7
  • Selling Aug 90 calls at $7.30 for each 100 shares
  • Break-even point – $81.2
  • Maximum Gains (as per current strategy without considering further actions) – $857 by Aug 15 or earlier.

What is a covered call option trading strategy– The covered call is a strategy in which an investor writes a call option contract while at the same time owning an equivalent number of shares of the underlying stock. If this stock is purchased simultaneously with writing the call contract, the strategy is commonly referred to as a “buy-write.” If the shares are already held from a previous purchase, it is commonly referred to an “overwrite.” In either case, the stock is generally held in the same brokerage account from which the investor writes the call, and fully collateralizes, or “covers,” the obligation conveyed by writing a call option contract. This strategy is the most basic and most widely used strategy combining the flexibility of listed options with stock ownership.

Watch-out: With this kind of strategy, profits are limited but losses can be substantial. This is a capital intensive strategy as well. So if you do decide to play this strategy, pls do your own due diligence and make sure you have risk management plans in place. You may read more about covered call here.

Profitable trading, OP

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