≡ Menu

A Play on Dell Takeover

News broke that Dell is in talks to arrange to be taken private.You’ll note that the present price is just below $13 with a takeover anticipated at $13.50 – $14.00.

Let’s look at the option trade on this stock. A covered call.

Buying the stock for $12.63 and selling the Jan ’14 call for $1.03 gives us an out of pocket cost of $11.60 (10% below the current price) and a return if called of 12%.

12% for a call that’s a year out isn’t the best return you’d expect. After all, you are taking on the risk of the deal falling through and the price dropping back to the recent lower sub-$10 levels. The bet here is that the deal will reach a conclusion in the next few months, and the time premium on the call will collapse to reflect the buyout price. In other words, a buyout agreement at $13.50 would push Dell to within a few cents of $13.50, and the $13 call wouldn’t trade for much over 50 cents.

Update – the deal closed and the shared were assigned on 9/26. 9 months, and a return of 12% or about 16% annualized. Not the kind of high returns options can bring us, but this trade was never intended to be that. This was a covered call for a stock that I was comfortable to own if it weren’t called.

{ 0 comments… add one }

Leave a Comment