Good evening fellas. I've been doing this trade with multiple accounts today...As much as I could...I can now share the wealth with others.
This is the deal:
Buy CIT-A at $1.75 (current price)
We will get a MINIMUM of 4.4 shares of common per share of CIT-A, right? (I know its over 4.2, do the math yourself for exact #)...Maybe as high as 6 if the minimum bondholders tender. Let us assume 4.4.
$1.75 / 4.4 = $0.40 cents per share of common.
Sell 4.4 $1 Nov(or January) calls per CIT-A share bought. Current calls with bids: 0.35(Nov) and 0.40 (Jan).
Net effect? With January calls sold, we are buying the CIT-A for *FREE*. We pay like 4 cents with the November calls.
If company goes bankrupt? calls worthless, we break even.
If company does not go bankrupt and exchange works? Two cases:
a) Common above $1, we get $4.4 per CIT-A when call exercised. 4.4 / 1.75 = 250% gain in 2-3 months with ZERO risk.
b) Common below $1, calls expire worthless. We thus get (common-price * 4.4) / 1.75 percent in profit.
One thing with this deal: Selling naked calls can be expensive with regards to margin requirements. I had to sell MANY positions, the ones which were 100% margin requirement, to put as much into this trade as I could.
One further point:
Bankruptcy sucks with this scenario. You can easily 'spend' a little of the guaranteed profit from the non-BK scenario and buy some Nov $1 puts. This easily gives you huge profit in BK or no-BK scenarios.
Enjoy the trade.
-Fernando