ERTS So Good

We've said it hundreds of time on the show before: Never buy out-of-the-money calls in hopes of a takeover. But with so much deal making going on, and so many days punctuated with takeover talk, the urge to merge may drive some options investors to reach out and buy those cheap calls.

We offered a better strategy on one perennial favorite, Electronic Arts .

Its top notch roster of killer games and six billion in cash make this stock a favorite with the mergeratti crowd. But had you bought a "cheap" call every time ERTS was in the news, you'd be hitting the reset button on one very expensive habit. As a takeover play, Dan Nathan suggested buying the Jan 11 20-strike call for $2.90. But to offset the cost, he sold the Jan 11 25-strike call for $1.40. Now, he's only shelled out a $1.50 to make a potential $3.50. But even that's a lot to pay for a takeout trade. So to further mitigate the costs, Dan than sold the Jan 11 14-strike put for $1.80. Now, Dan has put this trade on for a credit of $0.30, which means he make money so long as ERTS stays above $13.70 by Jan 11 expiration. But he still gets five bucks of upside should there be a takeout north of $25.

And that's how you play a takeover.

Questions, comments send them to us at: [e-mail]