I was looking to the option chain of SCTY this morning and I had an idea that probably has some flaw in it, but I can't find it. The problem is that normally you can have a high risk investment that has upside and downside, or you can have a low risk investment with a low downside but also a limited upside, but can never have the best of both worlds. But this idea seems to have a maximum loss of $1050,00 and a maximum upside of $7950,00.
You can sell a $24,00 Jan 2017 put for SCTY for $8,15 and buy a $21,00 Jan 2017 put for SCTY for $5,50. This means that you have a maximum loss of $3,00, but you already have gained $2,65. So your maximum loss is $0,35 (or 13,2% of your maximum gain).
If the deal goes through, Tesla Motors will buy SolarCity for 0,122 to 0,131 TSLA shares per SCTY share. If it goes through with the worst ratio this means that TSLA can fall to $24,00/0,122 = $196,72 and you still have the maximum gain of $2,65. It needs to fall to ($24,00-$2,65)/0,122 = $175,00 before you make a loss.
Because you sell the puts for $8,15, buy them for $5,50 and you need to have $3,00 as margin you only need to put down $0,35 for margin per put. So you could buy and sell 30 contracts and only need to put down $1050,00 for margin, and have a maximum gain of $2,65*3000 = $7950,00.
So IF you believe that the chances that...
A: The SCTY deal goes through
B: TSLA will be above $175,00 in mid Januari
...will be more than 13,2%, this should be a good deal. Or not?!
I am quite confused at the moment, but if I haven't made a logical misstep this could be quite a good opportunity for those who think that the deal will go through and TSLA won't plummet in the next two quarters.