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Put Sellers and Call Buyers Prepare for Dell Bid for Brocade

Posted on the 02 June 2011 by Phil's Stock World @philstockworld

Today’s tickers: BRCD, IP, APOL & DHI

BRCD - Brocade Communications Systems Inc. – Options volume is heavy in switcher-maker Brocade after a broker note predicted that it fits the bill for a bid from Dell. Shares in Brocade reached a 52-week high after the analyst noted that cash-rich Dell filed a debt-shelf earlier in the week of $3.4 billion or just about enough to buy Brocade if it wanted to change course and enter the networking market. One investor appeared to sell 11,400 put options expiring July at the $6.00 strike presumably on the assumption that its shares remain a hotbed of speculation for the next several weeks. The analyst’s note put a price tag on the stock of $10.00 underpinning a surge in the stock, which rose to $7.20 at the day’s best. Call options expiring next month were also well bid with the $8.00 strike proving most popular. Around 25,000 options granting the right to buy were exchanged with a current price of just 20 cents indicating a one-in-four chance of success over the next five weeks.

IP - International Paper – Notable activity in options on the paper-maker indicate one investor giving up on a good idea. Options volume of 20,935 on Thursday was made up of just two trades involving 10,000 lots each in what appears to be the closure of a losing calendar spread. On May 19 when shares in International Paper were trading one dollar higher than today at $31.67 an investor bought the same amount of call options expiring in July to buy calls expiring in January. The trade involved the $32 strike price in July and the $36 strike in January with the investor hoping for a steady climb in IP’s shares in the meantime. At the time the trade cost the investor 79 cents to employ. However, since that time the trade has suffered with shares wilting to $30.65 causing a narrowing of the calendar spread to 56 cents and imposing losses on the weary trader. It appears as though this time around the investor is giving up on this trade.

APOL - Apollo Group Inc. – Ahead of a report outlining the treatment of students looking for government financial aid, options were active in for-profit provider Apollo. There was substantial speculation in its options with call buyers looking for a swift gain from a favorable decision. The June call series at the $44 strike saw volume of about 13,000 lots midweek and roughly matching volume after a lenient report removed pressure on Apollo whose share price surged by 10% to $46.57 by lunchtime in New York. Earlier the price rose to $48.19. Curiously it appears that some 13,000 call options changed hands to the ‘ask’ price at a $4.00 premium – substantial, although remember that these call options leapt in-to-the-money overnight offering significant intrinsic value. On Wednesday the same call options closed at a premium of just $1.00.

DHI - DR Horton Inc. – Despite a lackluster performance in the housing market, equally reflected in that of homebuilders’ shares, one option investor appears to have made out well in what appear to be a closing transaction in DR Horton. The initial three-legged spread was placed on April 6 when shares in the builder closed at $11.49 and involved the purchase of vertical ratio spread with the lower leg in-the-money calls expiring November and the sale of out-of the-money puts. The investor paid a net 55 cents to buy 10,000 calls at the $11 strike, selling 15,000 calls at the $14 strike and sold 15,000 puts at the $9 strike. Having advanced by 40 cents to $11.89 the investor has been protected from the messy housing market by the fact that he selected the in-the-money call options. That aside, the timing of the initial transaction was pretty shrewd with investor turning bullish the day after DHI traded at its lowest point of this year so far. The trade appears to have been closed at an unadjusted net premium of 108 cents.

Andrew Wilkinson
Senior Market Analyst

Caitlin Duffy
Equity Options Analyst


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