ONN.tv new position alert

I recently signed up to recieve position alerts from the traders at ONN.tv. Here is the latest one. They are for the self-directed trader as an idea, and it is up to the individual trader to see if the position fits there risk/return profile and overall strategy.

Just thought I would share.


Option Trading Alert: MJN Cash Secured Put
by Jud Pyle
Posted on Mon, 16 Nov 2009 15:37 EST

Related Symbols:MJNFor our next Option Trading Alert, we are initiating a cash secured put in infant formula maker Mead Johnson Nutrition Company (MJN) as follows:

Trade Idea: MJN Cash Secured Put
•Sell to open 10 December 45 puts for $3.80 or better
•The limit price (i.e., when you execute your order, you should collect this amount for the puts) is $3.80

The Sentiment
MJN is declining today because Bristol Myers (BMY) has announced an exchange offer where BMY shareholders can turn in their shares of BMY, and receive $1.11 in MJN stock for every $1 of BMY they turn in. This exchange offer creates and arbitrage that puts pressure on MJN shares as arbitrageurs buy BMY and simultaneously sell short MJN. The shorting of MJN has caused the stock to become very expensive to borrow, causing the puts to become very expensive.

On a fundamental basis, MJN currently trades at 17-times estimated earnings for 2010. That valuation makes us feel that the shares can maintain the level needed for this trade to be profitable. MJN is also in a business area that has the potential to see mergers and acquisition activity. With such potential out there, we think that it will enable MJN to hold above the level we need to be profitable.

Trade Analysis

MJN is currently trading around $43.80, down roughly $1.50 today.

Cash Secured Put Spread:

•Sell to open 10 December 45 puts for $3.80 or better
•The limit price (i.e., when you execute your order, you should collect this amount for the puts) is $3.80


The Upside: Maximum profit for this short put is the $3.80 per put collected upon entry (minus commissions). The maximum profit will be achieved if MJN shares are above $45 when the options expire Dec. 18. The potential return on risk for this trade is 9.2% in 33 days.

The Downside: Maximum risk is $41.20 per short put, which is the put strike minus the credit received. For maximum loss to occur, MJN would need to be trading at $0 at December expiration. At this point, the 45 put is in-the-money by $41.20 and you would be assigned.

The margin requirement for this put could be as high as $41.20, or $4,120 per contract ($41,200 for a 10-lot).

Breakeven: Breakeven is the strike price of the sold put ($45) minus the credit, or $41.20. Below this level, the short put to lose money. MJN is currently trading about 6.3% above the breakeven point.

Probability of Success


Click here to enlarge


This strategy has a 38.93% chance of losing money and a 39.68% chance of achieving the maximum potential profit.

Trade Management
Because MJN is involved in this arbitrage, patience is going to be key. We feel that if we get assigned on the puts, that entry price of $41.20 represents a very reasonable value in the shares. To be disciplined, we would set a stop loss of $37.08 because that is 10% below our entry point.

Remember, Option Trading Alerts (OTAs) are generated by the www.ONN.tv team as a starting point for self-directed investors. OTAs are not intended as trading or investment advice or recommendations that any particular security or strategy may be suitable for any specific person. You are solely responsible for your investment decisions and should consult with a financial advisor if you require customized advice.