Arbitrage/Total Return Play ($AFSI)

I’ve written about trading options HERE

Today I want to illustrate a Total Return play I just executed a few moments ago.  Amtrust Financial is an insurance company scheduled to be acquired in the second quarter of 2018 for $13.50 per share.  The stock ($AFSI) is currently trading ex-dividend today (.17 dividend, record date is Monday 4/2) at 12.45.  If the acquisition goes through the stock will be taken out $1.05 above the current price.  If an investor were to purchase the stock today they’ll receive the dividend AND they’ll make a short term capital gain of $1.05.

Here’s what I did today; I purchased 4000 shares of $AFSI at 12.45, I’ll receive the .17 dividend ($680.) PLUS I sold 40 May 12.50 covered calls at .30 each (I captured $1200. in premium).  I am betting the stock acquisition takes place after May option expiration.  If this is the case I will gain an additional $4000. in capital gains from the acquisition for a total gain of $5,880 or 11% total return.

Worst case scenario is that the acquisition takes place before May option expiration.  In that case my total return would be $1680 (dividend + option premium from the covered call) or 3.3% total return.  The absolute WORST CASE scenario (which is unlikely in my humble opinion) is that the acquisition is blocked for whatever reason.   I see this as unlikely but there is still a small risk,.  In that case, my total return scenarios will be a mute point.

The point of all of this is to look for unique situations in the market where you can capture nice, low risk total returns and at times, in unusual ways.  Do your research….

DISCLAIMER:  THIS IS NOT ADVICE!  I am not an investment adviser, nor a professional in the financial services industry.  Options trading and stock market investment do have risks.  This blog is for informational purposes only and the reader is 100% risk responsible for any and all trades and investments made.


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