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Richard Croft
February 14, 2011
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Toronto’s TMX Group (TSX: X) is going global. At least if the London Stock Exchange has anything to say about it. The mating ritual between two elephants was the subject of much spilled ink (both real and electronic) last week, and if successful, will create an exchange organization with a combined value of about $6.25 billion.

The consolidation among financial exchanges has been underway for some time. Reflecting globalization of financial markets, as the search for investment capital crosses borders with the click of a mouse or, increasingly, the wave of a finger.

The deal for TMX Group is said to provide more liquidity, better access to global capital markets, and lower trading costs. I suspect the real story centers around the mining sector. The LSE has watched anxiously as its lead in global mining listings eroded last year. Supplanted by the Hong Kong Stock Exchange, which lured many global mining giants with its promise of access to gigantic pools of Chinese capital. The hope is that the London/Toronto merger would have the international heft to retake the high ground in the global natural resource sector.

The merger announcement added about $2 to TMX share valuation last week. Two questions emerge; 1) is that a fair value? and 2) how likely is it that the deal goes through?

This merger could easily become a political hot potato, which would be something the Harper Conservatives would want to avoid in advance of a possible spring election. The pop in TMX valuation might therefore be premature, or more importantly, may not yet reflect the true value of the merger.

In the interim, TMX option premiums expanded on the news, and are currently trading at a slightly elevated implied volatility. Traders might look at writing cash secured puts on TMX, with the intent of acquiring the stock at lower prices. Look at the TMX March 42 puts at $1.00 or better per share.

Another strategy is covered calls. Which is to say, writing covered calls on current positions, or buying shares and writing covered calls as a way to trade the merger. In this case, buy the shares at $42 pr share and write the March 42 calls at $1.00 per share.
Richard Croft
Richard Croft http://www.croftgroup.com/

President, CIO & Portfolio Manager

Croft Financial Group

Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.

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