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Use Options For a Chance To Buy RXN at a 16% Discount

Looking back to 131 days ago, Rexnord Corp (RXN) priced a 15,000,000 share secondary stock offering at $25.75 per share. Buyers in that offering made a considerable investment into the company, expecting that their investment would go up over the course of time and based on early trading on Wednesday, the stock is now 11% higher than the offering price.

Investors who did not participate in the offering but would be a buyer of RXN at a cheaper price, might benefit from considering selling puts among the alternative strategies at their disposal. One interesting put contract in particular, is the November put at the $25 strike, which has a bid at the time of this writing of 65 cents. That would result in a cost basis of $24.35 per share before broker commissions in the scenario where the contract is exercised. If the contract is never exercised, the put seller would still keep the premium, which represents a 2.6% return against the $25.00 purchase commitment, or a 5.8% annualized rate of return (at Stock Options Channel we call this the YieldBoost).

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Top YieldBoost Puts of of Stocks with Recent Secondaries »

Secondaries can often present buying opportunities for bullish investors interested in purchasing shares, because the sudden extra supply of stock tends to require that the offering be priced at an attractive discount to where the stock had previously been trading before the offering announcement. That can also introduce near-term volatility which improves the premiums a put seller can achieve. Selling a put does not give an investor access to RXN's upside potential the way owning shares would, because the put seller only ends up owning shares in the scenario where the contract is exercised. The chart below shows the one year performance of RXN shares, versus its 200 day moving average:

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