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VIDEOEmulex, NTAP: Nowhere to Go But Up?
Both names drive higher on rumored takeover bids.
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A Friday option-expiration high -- following a post-expiration sell-off that exceeded a 2% decline on worse than 3:1 negative breadth -- shows that, in 13 out of 18 instances, the next Tuesday will post gains of 1% or more.
Not sure we’ll get that 1% gain today, but we're already up 2% from the intraday low. This OptionSmith made a valiant stab at buying some Spyder Trust (SPY) calls, with limit prices tied to $82.25 and $80.50 on the SPY, but didn’t get triggered. It was worth a good try to trade for a bounce if the index approached the 50-day moving average near $79.80 share.
But as the portfolio already has long bias in individual names -- such as SanDisk (SNDK) and EMC (EMC), which both have upcoming earnings -- it seemed prudent to keep discipline of high probability entry points.
Speaking of technology, shares of Emulex (ELX) shot up some 40% on word that Broadcom (BRCM) has made an unsolicited bid. This merger had been talked about for months, but the options market had been very dismissive. In the May, June and July series there are less than a total of 2,500 call options open. Implied volatility had dipped to 65%, well below the 30 day realized which was running at 85% even prior to today’s move.
One name that traders continue to believe will see a takeover bid is Network Appliance (NTAP), whose shares bucked yesterday’s selloff, and were up again even in the face of today’s lower opening. Open interest has been building in the calls, with today’s volume leader being the June $20 call - which has traded over 3,000 contracts with 80% of the volume occurring at the asking price. This suggests renewed speculative buying.
As mentioned above, OptionSmith has a bullish position in EMC, and this name had been a rumored takeover candidate all of 3 weeks ago. But now the option action is taking on a much more bearish tone ahead of Thursday’s earnings report. So far, over 15,000 puts have traded, compared to less than 2,500 calls. The most active strikes are the May $10/11/12s, in which it looks like someone bought the butterfly 3,000 times for $0.20 net debit. The position achieves a maximum profit of $0.80 if shares decline to $11 on expiration.Twitter: @Minyanville/minyanville-markets-2
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