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9 Weeks to Better Options Trading: Special Situations: Earnings Reports, Takeovers, and Extreme Market Moves


Veteran options trader Steve Smith breaks down special situations.

Mergers and Acquisitions

Mergers, both real and rumored, may be coming back in vogue, providing not only a catalyst for stock-price movement, but for an increase in option activity. While overall M&A volume is near three-year lows, there are signs that with healthy balance sheets, low interest rates, and a slowly returning sense of confidence, we might expect a dramatic pickup in activity in the second half of the year

According to PricewaterhouseCoopers, as of the beginning of 2012, US corporate balance sheets had over $1.4 trillion in free cash, while private equity firms held in excess of $1 trillion in uncommitted capital. Last year, we saw a string of strategic corporate mergers, especially in technology, as firms like Intel (NASDAQ:INTC), Hewlett-Packard (NYSE:HPQ), and Amazon (NASDAQ:AMZN) gobbled up young companies for huge premiums, handing out big profits for those that found themselves sitting on out-of-the-money calls. These land grabs are hard to predict and, Facebook-for-Instagram notwithstanding and unplayable anyway, they have somewhat subsided of late.

No positions in stocks mentioned.

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