InteractiveBrokers Showing strength on a very down day.
InteractiveBrokers – Showing strength on a very down day.
InteractiveBrokers [NDQ:IBKR - $17.55] is up about 0.72% while virtually everything else is down today.
I’ve heard rumors that IBKR could be the target of a privatization by its founder and the price action in the calls seems to give some credence to this possibility.
The shares seem to have limited downside as they’ve already reflected some pretty poor recent quarterly results without suffering any damage.
A nice seven-month play…
|
|
Cash Outlay |
Cash Inflow |
|
Buy 1000 IBKR @ $17.55 /share |
$17,550 |
|
|
Sell 10 IBKR Dec. $17.50 calls @ $1.65 /share |
|
$1,650 |
|
Sell 10 IBKR Dec. $17.50 puts @ $1.60 /share |
|
$1,600 |
|
Net Cash Out-of-Pocket |
$14,300 |
|
If IBKR merely holds above $17.50 through the Dec. 18, 2010 expiration date:
- The $17.50 calls will be exercised.
- You will sell your shares for $17,500.
- The $17.50 puts will expire worthless.
- You will have no further option obligations.
- You will end up with no shares and $17,500 in cash.
This best-case scenario profit would be $17,500 – $14,300 = $3,200 for the 7.25 months through expiration date.
$3,200/$14,300 = 22.3% cash-on-cash or about 37% annualized achieved on shares that
- Go up.
- Stay unchanged.
- Hold at $17.50 or above.
What’s the risk?
If IBKR falls below $17.50 on Dec. 18, 2010:
- The $17.50 calls will expire worthless.
- The $17.50 puts will be exercised.
- You’ll be forced to buy another 1000 IBKR shares.
- You’ll need to lay out an additional $17,500 in cash.
- You’ll end up with 2000 IBKR shares.
- You’ll have no further option obligations.
What’s the break-even on the whole trade?
On the original 1000 shares it’s the $17.55 purchase price less the $1.65 call premium = $15.90 /share.
On the ‘put’ shares it’s the $17.50 strike price less the $1.60 /share put premium = $15.90 /share.
Your overall break-even would be $15.90 or (-9.4%) below the trade origination price of $17.55 /share.
Dr. Paul Price – May 14, 2010
Disclosure: Author is long IBKR shares and short IBKR options.
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