NMX Analysis
First let me start off from what I see via the charts. Generally speaking there is an aura of negativity here. It looks like, without a catalyst, NMX can retest 120-122 (and if the markets are weak maybe even 117 again).
Ever since its IPO NMX has been trading in a channel, hence a great trading stock. Also, ever since its IPO it has been considered overvalued w/a PEG constently over 2. However, that valuation recently changed. (I pointed this out about a week or so ago.) Earnings growth estimates were recently revised higher, much higher, so much so that the PEG is now about 1.20.
If NMX is going to be an acquisition target, how do we value it? A few months ago, the latest major derivative exchange to be acquired was ISE. The PEG of ISE with the announcement was about 2. Keeping in mind NMX has much better and faster growing products, an acquisition price for NMX may lead to a PEG higher than 2. With a PEG of 2, eps estimates of 2.59 and 5yr growth of 40% NMX can potentially command a $200 per share price.
Based on the chatter I hear from shows like Fast Money, Mad Money and CNBC (if that means anything, which I hold with a huge grain of salt) NMX will be acquired by NYX. But if NYX does not do it, another international player might, and the question becomes when.
Playing options for such an acquisition is still risky, especially if NMX decides to become an acquirer. Then I do not think it will ever break that trading range unless the 5yr growth estimates hold up to be true and can be exceeded.
Based on this assessment, an option play here, especially targeted for an acquisition, would be to sell the March 115 Put 08 options. Simply because we do not know if it will get bought out by year end, and a price around 140 translates to the high range of NMX trading range (which should be seen again by March 08… especially w/certain commodity prices still being high). So you get to keep the premium, time decay is on your side and 115 for NMX is a great price to pay for the exchange. (Especially if a buyout is very probable.) But upside exposure is limited by selling puts. If Time Decay is a point of stress, and you want to gain maximum upside from the options then play the 115/120 NMX March Calls when/if NMX sees 117-120.
So, selling 115 March puts and even buying 120 March calls could be a play here. The time decay that hurts from buying the 120 Calls maybe made up via the beneficial decay from selling the puts, yet still greatly benefit if NMX gets bought out before March. (FYI, this stragey gives you no risk protection to the down side, assuming 117 channel is broken due to some fundamental issue that develops w/NMX. If you want to add some protection to the down side, sell the 145 March Calls aswell. But if you are selling the calls and it does get bought out, you will need to potentially produce the shares at 145.)
(Word of advice… before playing with options to benefit from time or volatility decay know how they interact w/the stock, and know what you are doing with options. If you do not know, do not play. This can get tricky if you have to unwind the trade. In other words, observe the real time movements of the equity and options first, then understand it, then play it.)
