Monday, May 17, 2010

Transaction Alert: FAF Call Options

On Friday I purchased 2 sets of call options in FAF for a combined outlay of about $2,000. The first was 10 contracts of FAF October 2010 $40 Calls at $1.10 and the second was 20 contracts of FAF June 2010 $37.50 Calls at $0.50. The price of FAF is currently around $35 a share, so both these call options are currently "out of the money."

This bet falls a little outside the realm of normal value investing. FAF is splitting into 2 companies on June 1st, one that focuses on title insurance and another that focuses on information services. My current thinking is that FAF has a fair value of about $50 a share, and my hope is the spinoff will act as a catalyst for FAF shares to appreciate.

The danger with this investment is that it's very short term - so if there's a broad market selloff these options could easily expire worthless. On the flip side, if the market rallies in the near term these options could be worth a lot of money.

In conclusion, this "investment" is 1/3 special situation, 1/3 value investing, and 1/3 luck - my guess is there's a 50% it'll make money and a 50% chance it won't. HOWEVER, if it does make money it'll be 3x to 4x my initial investment, which is why I felt comfortable making the bet in the first place.