The Money Tree

Safely Generating Income in Retirement

Deep OTM NP Strategy – May Week 1

Posted by mounddweller on May 13, 2011

Fellow Traders,

Yet another week has passed us by.  We’ve arrived at the last week before May options expiration.  As is usually the case in the final week we don’t have much to choose from.  Just 4 selections this week, one of which is a very unusual situation.  Here are the 4 selections:

The interesting selection this week is PNSN.  It is in the financial services industry.  It operates as a clearing house for futures trades as well as providing other trade settlement and data processing services.  If you look at a 1, 2, or 5 year chart on it you can see that it has fallen substantially across all those periods.  However, until earlier this week , it had found support at around $5/share.  The big catalyst that caused further selling this week was something it disclosed when it announced quarterly results.  It seems it had acquired some bonds from a horse-racing venue of which one its Directors was affiliated.  The bonds are no longer paying interest.  Long story short something smells rotten in Denmark (or I should say Dallas, since that’s where they’re HQ’d).  The Director has resigned and the company may put itself up for sale.

The opportunity for us put sellers is substantial.  The stock fell heavily on Wednesday and Thursday before recovering today.  It closed at $3.34.  The MAY $2.50 put is at $0.10 bid.  That’s a 4% ROIC with a one-week holding period.  Pretty enticing.  What makes the trade worth considering is that even if the bonds referenced above were totally written off, PNSN still has a tangible book value of around $3/share.  This bit of information comes from an analyst at Raymond James.  So, if the put opens on Monday at $0.10 bid it might just make a good 5-day bet.



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