GGP Option play:
I am by no means an options expert but a friend passed this idea along to me recently and I put the trade on about a week ago. Although this trade is not nearly as attractive at the curent "net debit" it does represent a different type of trade idea than you might typically see suggested on IHUB. Since it does involve a company in bankruptcy it does meet the definition of a "BAD" trade idea.
Here are the details.
General Growth Partners (GGP) has a firm and binding bid of $15 per share by a stalking horse bidder to purchase the company out of bankruptcy. The offer remains in effect until December 31, 2010. It is expected that there will be competing bids, but the $15 is guaranteed. At the time I put on the trade, the stock traded around $16 but it is now at 16.74. Just think, back in February and March 2009 you could have gotten all of that you wanted for under $0.50!
In a simultaneous transaction, I bought the stock at $15.92 and sold the $15 strike October 2010 covered calls for $2.63 so I have an average cost of $13.29 and I am guaranteed to receive $15 in the auction process. If the stock stays above $15 into the october expiration, my stock will be called away. In either event, I will make a guaranteed return of 12.87% in 6 to 7 months or sooner if someone decides to exercise their "in the money" option before expiration. If they call it early, I will put the trade on again if conditions remain the same. If the covered calls expire and the stock is below $15 then I keep the stock and can either hold it until the auction is complete or I can sell more covered calls and repeat the process.
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