Cheap options, potentially strong sector…time to buy calls?

BCE is on the auction block, apparently being in the sight of three major pension funds, not to mention private equity investors. The BCE strategy is to draw more suitors into the fray, hoping to spawn a higher price for shareholders. So what else is new?

This is not a blog about BCE, nor is it about how Canada is becoming a target rich environment for takeovers. And not just from within the oil patch.

This is a story about the impact takeovers could have on the earnings of Canada’s investment bankers. From potential bridge financing to advisory services. The big Canadian banks will be players in the Canadian takeover game.

Timely too… as most of the major Canadian banks are reporting earnings this week. Already Bank of Montreal (symbol BMO) has hit center stage and I think their numbers are an indication of things to come. BMO was able to offset significant commodity trading losses in the quarter with higher money management fees from their mutual fund division, and trading activity.

BMO didn’t spend much time talking about investment banking activity, because I don’t think the real numbers from this segment of their business will hit the bottom line until next quarter. Same with the other major players… particularly CIBC (symbol CM) and Royal Bank (RY).

Options on the major banks are relatively inexpensive when compared to other sectors. Just ask anyone who has sold covered calls on this sector over the past couple of years. Not enough premium to justify the loss of upside potential.

As such, buying calls on these stocks is appealing right now! Specifically if you can buy three month at-the-money calls with implied volatilities around 15%.

I particularly like calls on CM, because we may see a dividend increase and a stock split this quarter. Stocks splits provide no theoretical economic benefit to shareholders, but history shows that a stock split spurs buying activity, especially if it comes with a dividend increase.

I believe that a stock split / dividend increase combination would definitely provide economic benefit to CM call buyers.