NEW YORK (TheStreet) -- Actions by uber-investors, like Nelson Peltz against the Bank of New York (BK) and Carl Icahn against Apple (AAPL), are instructive in showing how to profit using options. Popular mergers and acquisitions, as well as other transactions, can provide similar opportunities. Investors following Icahn with Apple shares and Peltz's earlier pressuring of Mondelez (MDLZ) did well, and there is no reason it cannot happen with the Bank of New York and others in the future.
Jim Cramer is bullish on Bank of New York and recommends "piggybacking" on Peltz's position. Doing that using options can be even more profitable than owning the stock.
Options are agreements where a buyer has the right, but the not the obligation, to buy ("call") or sell ("put") the underlying asset at a specific price within a set period of time.
When a Peltz or an Ichan goes after a publicly traded company, "in the money" call options are probably the best way to profit. Call options grant the option holder the right to buy a stock at a particular price, called the "strike" price. With "in the money" call options, the strike price of the option is lower than the market price. If the stock price falls below the strike price, the options expire worthless.
On Friday April 19, Peltz disclosed a position of nearly 20 million shares in Mondelez and nearly 4 million shares in Pepsico (PEP)
Before the news hit Wall Street, Mondelez was under $30 a share. Peltz then issued a "white paper" calling for Mondelez and Pepsico to merge. He "talked his book," touting Mondelez at such events as the "Invest for Kids" Conference in Chicago last October. Now Mondelez is over $38 a share.
The same thing can happen with Bank of New York.