Blackberry - Trading the takeover hype

So full disclosure, this is not a trade I'll be entering. I've a friend who was considering buying BBRY before the current takeover rumors, so I said I'd detail a few ways to play it.

Trading on hot air?

Management have confirmed they're looking at offers, but the current price is based on pure speculation that they find an attractive one. To that end, there's every chance the mania will subside and the price will pull back a bit in the coming day's.

Rather than pay today's price, you could try your luck selling put options to pick it up at a lower price. As discussed in the previous link, it's a lot like setting a limit order below the current market price except you receive money for agreeing to buy the shares at a lower price.

The 13th Sept 2013 expiring BBRY put option wih a $10.50 strike price is currently trading for a $0.23 option premium. You could sell 100 contracts and receive $230 in fast money today (100 put option contracts x 100 shares per contract x $0.23). If between now and the 13th of September BBRY shares drop below $10.50 you'll then have to purchase 10,000 shares of BBRY. That's a 2% return this week if you promise to buy the stock at almost 5% below the current market price.

If the price doesn't drop below $10.50 by the end of next week, you won't have any BBRY shares. You will have a guaranteed 2% return, and you might be able to repeat the same trick again the following week to bank another 2%.

But I want to own the stock too

They hope to have something sorted by November. Whatever the offer is, you have to hope it's higher than the current stock price to be of any interest to anyone. One way to play it is to buy the 16th November 2013 expiring call option at the $11.00 strike. This gives you the right (but not obligation) to buy the stock any time between now and the 16th of November for $11.00. If the stock is trading at $14.00, you still only have to pay $11.00. If it's trading at $9.00, then you'd ignore the option and just pay $9.00 (assuming you still wanted it).

The option is currently trading at $1.38, so it's going to cost you $1,380 to reserve that privilege (100 call option contracts x 100 shares per contract x $1.38). That's offset at least $230 by the put options you'd sell from the previous section. You might be able to offset it further if you're able to keep repeating that put option strategy.

Published on in Trades