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Buzz and Banter


PeopleSoft(PSFT:NASD) options have been relatively quiet for some period of time, but yesterday and again today have traded with heavy volume. PSFT currently has a hostile tender offer of $19.50 cash from Oracle(ORCL:NASD). This offer will expire on September 19, but will most likely be extended as the DOJ is reviewing the proposal and will likely take until mid November to respond.

Specifically, there has been a large buyer of October 20 calls. The customer, a hedge fund, has paid as high as $.70 with the stock at $19 for over 10,000 options. The implication from the trading is that ORCL will increase the value of the deal. The stock has been trading up along with the calls.

Perception is often more important than reality (at least in the short term). The stock has been trading up as whispers of an increased deal have surfaced, mostly because of the call buying. But there is another distinct possibility. The company is having an analyst meeting in the next few days. The stock may be trading up on that and the call buyer may be using the positive spin to create the perception of an increased bid by ORCL. Our analysis shows that it would make little sense for ORCL to increase their bid now.

If the buyer of the calls is who I think it is (I have seen this pattern before), we should see the calls sold out (or stock shorted against them) around the time of the meeting (before or after). PSFT promises to be volatile over the next few days, but we believe that the stock should settle in around these levels if not slightly lower and then go into a quiet period.
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