Dell - Risk/Reward Update

| About: Dell Inc. (DELL)

There has been a lot of news recently about Dell (NASDAQ:DELL) and potentially higher buyout prices than what Michael Dell and Silver Lake have offered. This news has sent Dell's share price well above the only firm offer extended to shareholders. The table below lays out the current share price with relation to the expected offers.

Ichan's Offer


Current Share Price


Blackstone's Offer


Michael Dell & Silver Lake's offer


To put all of this into perspective, Dell was around $10.00 per share to start the year before these bids materialized. Also, Dell has lowered their earnings estimate for future years several times since the offers were put together - that's not a good sign.

With the current share price, the risk-reward offered to investors is not great. The best outcome for investors is the bidding war continues with all parties raising their bids - but Wells Fargo has suggested the final price won't rise above $15.00 per share. That implies a maximum gain of 3.5% for the stock.

On the other side, a realistic negative outcome for investors is the two new parties never produce actual bids and the company is eventually bought out at Silver Lake's original price. That implies a loss of 6% for the stock from current prices.

For investors who are still optimistic about the outcome of the current process, options are a much better way to gain exposure. Investors can buy $14 calls for very little premium. The May $14 call currently trades for $0.60 - which is a premium of just a few cents. Investors can further limit their risk by selling the $15 call against it for $0.10 creating a call spread.

This call spread creates a 1:1 risk/reward ratio which is better than the risk/reward presented by the stock at current prices.

The process will probably take several weeks to play out with many ups and downs along the way, so investors should plan accordingly in what options they buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.