Derivative View - Meridian Equity Partners, Inc. · 2009. 7. 30. · Derivative View: Meridian...

Member NYSE, FINRA, AMEX, NFA & SIPC

5 Hanover Square Floor 21 New York NY (212) 500-6650 *Please see important disclaimer on page 8. **Data: Bloomberg LP, IVolatility, Meridian Equity Partners, Inc.

Option Analytics Daniel L. Hutchinson

[email protected] Richard D. Gatto

[email protected] 212-500-6650

M e p t r a d e r s . Co m Thursday, July 30, 2009

simply consider the 1x2 put spread to layer over existing short positions. Ei-ther structure creates a maximum payoff at the strike of the short puts. 5 to 1 payoffs might be enough to cushion a 10% selloff from here to year-end, with some protection down as much as 20%. This relatively inexpensive position might give managers more confidence to focus on optimizing the upside in their individual share positions.

Market Commentary. 1

SPY Put Fly. 2

QQQQ Put Fly. 3

IWM Put Fly. EEM Put Fly.

4 5

P&L Tables 6

Arbitrage Update 7

Inside this issue:

Derivative View: Meridian Equity Partners Options Market Overview July 30, 2009 AM Hedges to Year-End, What Does it Cost? Here we are seven months through the year, with all major indices in at least sin-gle digit positive territory, and caution being reflected both by the option market and fundamental analysts. How does one create cost-effective protection on the downside? Very few managers would sacrifice the upside here to offset the downside cost of puts, so perhaps it worth looking at the risk/reward profile of put butterfly’s to Dec expiration. In, fact the risk/reward is compelling enough to sug-gest that discussion should be had as to why specifically this structure was not employed. QQQQ, SPY, IWM and EEM structures are detailed in the attached. The first three utilize quarterly options, to Dec 31, and EEM to regular expiration at Dec 19. The put ‘fly incorporates one long at-the-money put, short two out-of-the-money puts, and long one even further-out-of-the-money put. Long/Short managers can

Position QQQQ SPY IWM EEM

Long 1 Dec31 39 Put

Dec 31 97 Put

Dec 31 53 Put

Dec 19 35 Put

Short 2 Dec31 34 Put

Dec 31 88 Put

Dec 31 48 Put

Dec 19 30 Put

Long 1 Dec31 29 Put

Dec 31 79 Put

Dec 31 43 Put

Dec 19 25 Put

Net Debit

$ 0.83

$ 1.69

$ 0.68

$ 1.00

7/29 Close 39.74 97.65

55.62 35.65

Debit as % of Stock Price 2.09% 1.73%

1.22% 2.81%

http://www.meptraders.com


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SPY Long 1 Dec31 97 Put Short 2 Dec31 88 Put Long 1 Dec31 79 Put

Price Date P&L P&L% at Expiry __/__/__

105 12/31/09 $(169.00) -100 100 12/31/09 $(169.00) -100 95 12/31/09 $ 31.00 18.34 90 12/31/09 $ 531.00 314.2 88 12/31/09 $ 731.00 432.54 85 12/31/09 $ 431.00 255.03 80 12/31/09 $ (69.00) -40.83 75 12/31/09 $(169.00) -100 70 12/31/09 $(169.00) -100

QQQQ Long 1 Dec31 39 Put Short 2 Dec31 34 Put Long 1 Dec31 29 Put Price Date P&L P&L% at Expiry

40 12/31/09 $ (265.00) -100 38 12/31/09 $ (165.00) -62.26 36 12/31/09 $ 35.00 13.21 34 12/31/09 $ 235.00 88.68 32 12/31/09 $ 435.00 164.15 30 12/31/09 $ 635.00 239.62 28 12/31/09 $ 835.00 315.09 26 12/31/09 $ 1,035.00 390.57 24 12/31/09 $ 1,235.00 466.04

IWM Position

Long 1 Dec 31 53 Put Short 2 Dec 31 48 Put Long 1 Dec 31 43 Put

Price Date P&L P&L%

at Expiry 57 12/31/09 -74 -100 55 12/31/09 -74 -100

52.5 12/31/09 176 237.84 50 12/31/09 426 575.68

47.5 12/31/09 176 237.84 45 12/31/09 -74 -100

42.5 12/31/09 -74 -100 40 12/31/09 -74 -100

37.5 12/31/09 -74 -100

EEM Long 1 Dec 19 35 Put Short 2 Dec 19 30 Put Long 1 Dec 19 25 Put

Price Date P&L P&L%

at Expiry 40 12/18/09 -85 -100

37.5 12/18/09 -85 -100 35 12/18/09 -85 -100

32.5 12/18/09 165 194.12 30 12/18/09 415 488.24

27.5 12/18/09 165 194.12 25 12/18/09 -85 -100

22.5 12/18/09 -85 -100 20 12/18/09 -85 -100




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Arbitrage Update (Joe Greco) **Our team members are available and able to have a confidential discussion about what you are modeling or how to maximize a current position given the current market strength...feel comfortable initiating the conversation, we are here to help. Cwd v C ‐ yesterday saw heightened interest in buying Cwd at a discount to C, and selling Cwd at a premium to C, ahead of the final day of when issued trading following CitiGroup's mammouth preffered share conversion. Interest to collect .05 either way were only able to meet their objective closer to the end of the session, with a final dislocation of .06 with C closing 3.22 and Cwd going out at 3.16. Today we expect more of the same, and will be active from the onset. ANNOUNCED DEALS SGP/MRK ‐ after two days of unwind pressure out near 1.50, it appears the bullish arbs have returned, pressing the deal in to close 1.18, after seeing 1.05 intraday... we expect the arbs to stay at this and WYE/PFE as earnings season passes the midway point, we anticipate both boards to remain focussed on closing the deal in Q3. WYE/PFE ‐ as with SGP/MRK, arb pressure steadily nudged this deal spread in from 2.05+ to close 1.80 as market momentum and new deal announcements bolster support for a second‐half rally in merger world. Again, we expect as earnings are fully digested, the focus will turn to completion of the deal for Q3. FCL/ANR ‐ we are starting to think perhaps top‐shareholder of ANR Duquense's denouncement of current deal terms was nothing more than a last minute plea for a few extra bucks for their 8% stake. It coincided nicely with both earnings season and a pop in the market, as well as a few cash deal announcements that have further supported the hunger for consolidation across several sectors. Pro‐deal endorsements by Glass Lewis and RiskMetrics last Friday ignited setup interest, and the spread has compressed in from as wide as 2.36 down to .30ish this morning. Shareholder vote scheduled for tomorrow, Friday 31 July. NRG/EXC ‐ continues to be one of the more active spreads traded, although the parties have both acknowledged disintegration of interest to find an agreeable price. Spread trading had been out past 4.00 most of last week, but the last few days have steadily compressed this now "pair spread" to 1.50...with little resistance on the way in. Chatter is arbs still feel there value in NRG, but we would be surprised to learn of a second suitor able to cough up north of $30/sghare in this market... with sustained low valuations, peers are wiser to consider consolidation via merger of equals (and more likely to succeed as such). CTX/PHM ‐ closed at .10...consolidation should continue to develop among the homebuilders and we anticipate more deals in the beleaguered industry once financing and accurate pricing of targets may be determined...PHM reports 3 Aug, CTX this week (expecting a loss of $1.17/sh) ...special mtg 18 Aug for shareholders. CF/AGU ‐ the acquirer, AGU, announced Monday they will extend their exchange offer until 19 Aug, and the spread tightened ac‐cordingly over the week, closing at 5.86...this deal consistently garners interest for arbs, trading in a range of $5‐8 in two erratic names (illiquid, prone to .25‐.50 swings intra‐day)...we have several interested parties in this and other non‐announced agricultural pairs spreads....AGU earnings out Aug 5. PAS/PEP and PBG/PEP ‐ active by volume traded, but quiet here for clients as most positioned themselves early on....deals trade at a premium of ‐2.57 and ‐3.01 respectively. NTG/CAM ‐ trading wider at .84 today...we saw setup interest recently as it widened and the target/acquirer reporting next week... we should have interest again once there is a clearer picture of each firm's Q2 performance...CAM earnings out 4 Aug, NTG set to release in the first 2 weeks of Aug. Joseph C. Greco




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Options Analytics Disclaimer: Although the information and statistical data provided herein have been obtained from sources which we believe to be reliable, the accuracy and com-pleteness of this report cannot be guaranteed. In addition, due to the volatility of the market, the conditions on which the report is based and the opinions expressed in the report, if any, are subject to change at any time and may not be reflected in the report. Futures and options trading involve substantial risk. The valuation of futures and options may fluctuate, and as a result, clients may lose more then their original investment. In no event should the content of this presentation be construed as an express of an implied prom-ise, guarantee or implication by of from the Meridian Equity Partners, Inc. that you will profit or that losses can or will be limited in any manner whatsoever. Past performance is not necessarily indicative of future results. Information provided in this presentation is intended solely for informative purposes and is obtained from sources believed to be reliable. Infor-mation is in no way guaranteed. No guarantee of any kind is implied or possible where pro-jections of future conditions are attempted. The Firm does not make recommendations. This report is for informational purposes only and should not be construed as a solicitation to purchase or sell securities of any kind. The securities described herein may not be appropriate or suitable for all investors. Options’ trading is not suitable for all investors and involves a number of inherent risks including risk of loss. The Options Clearing Corp. ("OCC") Option Disclosure Document should be care-fully read before investing. A copy may be obtained from Meridian Equity Partners, Inc. at: 5 Hanover Square, 21st Floor , New York, N.Y. 10004, by calling 212-500-6650, or from the OCC web site: http://www.optionsclearing.com/publications/risks/riskchap1.jsp

Derivative View - Meridian Equity Partners, Inc. · 2009. 7. 30. · Derivative View: Meridian...

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