Airgas Could Get Deflated

If Air Products' takeover falls apart, this put spread would take advantage of the downside in ARG.
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In their own peculiar way, stocks are like a form of matter. Matter exists in different states determined by distinct phases. Any chemistry major can tell you that all forms of matter can exist as a solid, a liquid, plasma or a gas, depending on temperature and pressure. Chemists diagram the phases along a temperature and pressure graph that shows the changes and effects on matter. Traders diagram stocks in a similar way. As any experienced trader knows, the temperature of a stock can be hot, cold or tepid. The pressure on a stock can cause it to levitate or get crushed.

Professional options traders use their own graphs in order to measure very important phases of stocks relative to their risk/reward potential. Time's effect on the change of the delta is a valuable graph for the professional options trader. The key graphs for me were those of the underlying stocks' time and price as it related to the position's delta and gamma. Money is made or lost in options at the phases of the underlying stock's price. The diagram of the position showing the net effect due to its gamma allows an options trader to predict the future should the event -- the price change -- occur. In addition, pre-knowledge as to how changes in price would affect the delta can make all the difference when managing a position, especially in volatile phases!

Airgas ( (ARG) ; $65.02) has been in takeover limbo for most of this year. Air Products(APD) - Get Report now wants to buy Airgas for $65.50 a share (after lesser bids got the thumbs down by ARG management). But the Airgas board has declared that even that figure is not enough. Spend enough time attempting to take over a company, and as time slips away, so do the arbitrageurs -- those traders who take large stock positions after a possible takeover is announced. They tend to slip away from the party as quietly as possible, because they could get severely hurt should all of them attempt to get out at the same time (Wall Street's version of "musical chairs" is played for serious cash!).

Should this takeover attempt go awry -- for whatever reason -- Airgas' stock price could take a big hit, possibly retreating all the way back into the mid- to high $40s. Odds do not favor that event, but we can identify some low-risk/high-reward speculations, should you like to take the contrarian approach to this prolonged takeover fight.

Consider the following put spread to speculate on the potential downside for ARG: Buy 1 ARG January 65 put for $4.00 and sell 1 ARG January 57.50 put at $2.00. The breakeven level for this spread would be ARG at $63 by January expiration. The total potential profit/gain for the spread is $5.50 if ARG is at $57.50 or less by January expiration.

The trade: Buy 1 ARG January 65 put for $4.00 and sell 1 ARG January 57.50 put at $2.00

At the time of publication, Raschke had no positions in the securities mentioned.

Skip is a former registered options trader and member of the Philadelphia Stock Exchange. He was an equity options analyst and broker with Paine Webber and a proprietary trader for Van Der Moolen. He served in the USMC, as well as played minor league baseball with the N.Y. Yankees organization. He is an independent stock and options market consultant.

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