Stock of the month for July

For July, the stock of the month is slightly changed to the trade of the month. The stock in question is American Capital (symbol ACAS). The trade is to buy the stock and write the November 5 straddle. Current prices are $4.89 for the stock and 80 cents for the call and 90 cents for the put. If the stock is above $5.00 in November, you will sell the stock for $5 and keep the $1.70 that you get for selling the straddle. This is a return at a rate of about 110%. If the stock is below $5, you will have to buy more for a net price of $3.30.

ACAS just completed a deal under which it is completely recapitalized. It no longer has a risk of default, and it has a lot of new money to invest in its role as a business development company. ACAS also made a profit in recent months so that it will have to pay a dividend under the requirements of the tax law. The book value is much greater than the present market price. There is a risk in connection with the European business which the company owns; however, this is minimal. In short, ACAS should be worth much more than $5 in November. If it is not, however, it will be worth holding into the future since it will rise to at least twice that amount in the next three years.