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Daily Options Intelligence Report

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Option traders say Broadcom bid for Emulex set to fail

Tue, Jun 30 2009, 16:35 GMT
by Andrew Wilkinson

Interactive Brokers LLC

ELX – Emulex Corp. - An interesting story has been developing at network gear-maker, Emulex in which the company is being courted by Broadcom Corporation. Two months ago Broadcom offered $9.25 per share for Emulex in an effort to integrate the two companies to develop new technologies for corporate data centers. The initial Broadcom overture came in December 2008 to which Emulex wrote a letter to the company stating it was not for sale, cutting off talks and writing a poison-pill provision into its bylaws. In an effort to convene a special shareholder meeting the company has boosted its offer to $11 per share and extended a tender offer deadline to July 1. Broadcom would then try to have the poison pill provision removed. However, shares at Emulex are down 8% to $10 today after the increase in Broadcom’s hostile bid. About three weeks ago we saw option traders scoop up put options at the July 10 strike for 45 cents apiece, while today there is increased interest in those same puts. We believe several investors are today banking gains on some established positions with puts trading hands at 75 cents today. Yet clearly there is a significant amount of fresh interest going on as investors speculate that Emulex means what it says and its shares will decline on account of the successful poison pill amendment. Some 27,000 puts are in play at the July 10 strike while the open interest reading of 17,000 has easily been surpassed. At the same August strike where only 44 contracts are open, defensive options have been bought more than 8,000 times so far today. As a result of the increased uncertainty surrounding this story options implied volatility has increased from 45 to 73%.

GERN – Geron Corp. – The biopharmaceutical company engaged in the development of human embryonic stem cell-based therapeutics appeared on our ‘hot by options volume’ market scanner this morning amid a 19% surge in shares to $7.96. Shares of GERN have climbed about 43% since the start of the year after the firm received FDA clearance to commence the world’s first human clinical trial using human embryonic stem cells to treat acute spinal cord injury. Today’s rally arrives on the heels of an announcement that Geron has forged a partnership with a General Electric Co. (GE) unit. The biopharmaceutical company asserted that it will collaborate with GE Healthcare to develop commercial products that use human stem cells. Optimistic option traders were seen buying into the bullish news by picking up nearly 2,000 calls at the now in-the-money July 7.5 strike price for a premium of 74 cents apiece. Profits will begin to amass for call-holders if shares can climb higher than the breakeven point at $8.24 by expiration. Investors who expect shares of GERN to break through the current 52-week high of $8.50, looked to the August 10 strike price where some 1,300 calls were purchased for 43 cents per contract. A rally of approximately 31% from the current price would result in profits to traders long the August 10 calls beginning at a share price of $10.43.

VALE – Vale S.A. – Shares of the Rio de Janeiro-based iron-ore producer have slipped approximately 1.5% today to $17.59 following earnings which were scheduled for release after yesterday’s closing bell. Despite the slight decline in price, our attention was drawn to the August contract where one investor chose to initiate a bullish reversal play. The trader looks to have sold 10,000 puts at the August 16 strike price for a premium of 65 cents apiece in order to finance the purchase of 10,000 calls at the August 20 strike for 65 cents each. The reversal was established at no cost to the investor who has positioned himself to benefit from upward movement in the price of the underlying. Profits will pad this option player’s pockets if shares can rally approximately 14% to breach the breakeven point at $20.00 by expiration in August. Any interim disappointment could see this investor having a block of one million of Vale’s shares put to him at a 9% discount to today’s share price.

NVDA – NVIDIA Corp. – The manufacturer of programmable graphics processors has realized a more than 2.5% decline in shares today to stand at $11.26. Wary of further bearish movement in the price of the underlying, option traders were seen scooping up put options in the near-term July contract. The July 11 strike price appears to have had about 20,000 puts purchased for an average premium of 33 cents apiece. Investors may be utilizing the puts to protect long positions in the stock or they could be looking to profit to the downside beneath the breakeven point at $10.67.

EXC – Exelon Corporation – The public utility holding company was launched onto our ‘most active by options volume’ market scanner after one trader played with 100,000 calls on the stock. Shares of the firm are currently higher by 1.5% to $51.22. It appears that this individual originally purchased 50,000 calls at the July 55 strike price for 40 cents apiece on June 25, 2009. Today he threw in the towel by selling-to-close all 50,000 lots for 20 cents. Apparently he does not see the July 55 calls landing in-the-money by expiration. Not yet ready to completely give up hope for a bullish rally, the trader accepted a loss of 20 cents per contract or $1,000,000, and reestablished a long position in the August contract. He paid a much more expensive 90 cents per contract, or $4,500,000, to get long of 50,000 calls at the August 55 strike. Shares must move higher than the breakeven point on the current call position in order to regain losses experienced on the closing sale in the July contract. EXC’s shares must move hard and fast in order to add about 10% to the current price. The investor will need the price of the underlying to reach the effective breakeven point at $56.10 to recoup losses and to breakeven by expiration in August.

Published on  Tue, Jun 30 2009, 16:38 GMT