Today, I initiated a costless risk reversal spread to take advantage of the expected sale of MEE:
Trade Details Cost Basis
Sell 2 contracts of MEE 2010 DEC 32.00 PUT @ $0.40 ($80.00)
Buy 1 contract of MEE 2010 DEC 50.00 CALL @ $0.75 $75.00
Total Cost ($5.00) (credit)
Breakeven Price: $31.97
As long as I am willing to buy the stock at $30 (in case there is no deal), this spread provides me $5 credit initially and unlimited upside should MEE's price exceeds $50 by December 18, 2010. Statistically, there is about 7.6% probability of MEE's price being $32 or lower by the expiration date. So, I am willing to take the risk of buying the stock at this price. Also, this price level corresponds to the congestion area from which the price broke up indicating good support at this level. One thing to remember is that one would have to post margin for the Put side of the spread or cash-back the short puts ($6,400 less $5 credit).