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Technology Stocks : MEMC INT'L. (WFR -NYSE) The Sleeping Giant?
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To: SE who wrote (4299)3/22/1999 11:10:00 PM
From: Carl R.  Read Replies (1) of 4697
 
Your suggestion is the play if you own the stock, which I don't at the current time. <g>

I just checked to WFR puts and the action is incredible.... if you like watching paint dry. <G> WFRPA (April 5) has no bid or ask and an open interest of 15 contracts and was last traded on September 29th 1998 at a price of 1 3/4. And as for WFRPU (April 7 1/2), some big spender probably has all 3 outstanding contracts. The bid and ask is 1 1/16 bid and 1 1/4 ask.

Let's forget for the time being that the rights expire April 13 while the puts expire April 17th, and let's also ignore commissions. Assume that I short WFR at 6 1/2 and sell a WFRPU put for 1 1/16. I now have $7.5625 to invest for three weeks. At 5% that is another $.022. If the stock stays under $7.50 then I have to buy it at $7.50 due to my put, which will close my short at a profit of $.084. But of course if the stock goes above $7.50 I could have a loss, so I buy a right for $.0625. Now if the stock stays under $6.875 I make only $.022. If the stock rises above $6.875 my profit rises due to the rights increasing in value. At $7.50 my rights are worth $.5625 for a profit or $.50 in addition to my profit of $.084 on the put/short, giving my a combination profit of $.584 on no risk. If the stock goes above $7.50 profits on the right offset losses on the short, and the profit stays the same.

Thus in this example there is no risk, and there is always a profit. If you include commissions the picture changes, however. My commissions would cost me about $.08 for the transaction (stock short +sale of put+purchase of rights + buy stock) so I would have a loss below $7. Big players on the floor have much lower commissions, however, so they may pull this play. Also the rights may well sell below 1/16. But the other problem is the mis-matched dates. The player would be naked from 4/13 to 4/17, or would have to buy some April calls at expiration of the rights, adding to the costs.

Let's watch for some trading action in WQFPU puts over the next several days to see what happens.

Carl
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