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.
These stocks do not head straight up; there is volatility in the price action allowing investors opportunities to buy options to take advantage of the high-profile investor's public involvement and the stock's reaction. The best opportunities for profits emerge when the investor is speaking.
When Peltz spoke about Mondelez at the "Invest for Kids" Conference, the share price rose a dollar (I was in the audience at the event and will be there again this year for TheStreet). For those owning call options in the money, that was a nice profit for a day's work. Over the last year, basically the period that Peltz has owned Mondelez shares known to the public, the stock has ranged from $29.37 to $39.54, so there is money to be made in the price volatility.
That is equally true with mergers and acquisitions.
An excellent example is the recently announced merger between Reynolds Tobacco (RAI) and Lorillard (LO). The deal was in the press on July 15. Articles first started appearing about the merger on July 3. Over that period, Lorillard rose from opening at $61.23 on July 3 to hitting a high of $67.46 on July 14. But the stock price did not shoot straight up: on July 10 it was at $62.07, according to Yahoo! Finance.
In other words, there was plenty of money to be made in the options market after word got out about the merger of Reynolds and Lorillard as the share price moved.
Options are cheaper so it allows for speculating on the high levels of mergers and acquisitions, investor activism, and other actions at a lower price. As Apple, Mondelez, and the recent merger between Reynolds and Lorillard clearly show, it can be done following the market through TheStreet.
Savvy investors should also track Peltz, Icahn, and others in speaking engagements, Twitter feeds, etc., to monitor their actions. The "Invest for Kids" Conference is coming up on Nov. 6: Speakers include Bill Ackman, head of Pershing Square Capital Management, and Nehal Chopa, with Tiger Ratan. There should be actionable trading advice coming from those investing luminaries and others as there has been in previous years.
At the time of publication the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.