Blue Coat Systems: SEC Probe Goes Formal

If you are thinking about taking a long position in Blue Coat Systems (BCSI), you may want to think again. If you already own the stock, consider buying some puts for protection or sell some covered calls to take advantage of the implied volatility pumped into the premiums currently. Well, here’s my personal take on the situation.

BCSI announced in an 8-K filed Tuesday that a previously disclosed SEC investigation of Blue Coat's historical stock option granting practices has gone from informal to a formal investigation. Further, the SEC has issued a subpoena to a former officer of Blue Coat.

Blue Coat Systems commented that current directors, officers, and employees have cooperated with the SEC, producing documents and providing testimony on a voluntary basis. At this point, SEC's investigation is a nonpublic, fact-finding inquiry to determine if there have been violations of the federal securities laws.

BCSI was down close to 3% yesterday, down 25% for the year, and down nearly 70% since its all-time high above $53 just last October . The company missed earnings expectations last month and much of the bad news may be priced in.

The options market barely responded yesterday to this news as of this report, as total options volume in existing contracts has just cracked 200 contracts. Implied volatility is ahead of the 10 and 21-day historical volatility, so options may be a little rich right now. Open interest for June calls remain very high, even in the strikes up to 30. Looks like those unfortunately long in the June calls above 17.50 are in for a rough ride between now & expiration.

Disclosure: none

Comments

[WarTwin]

You know, I was wondering when the other shoe was going to drop with BCSI. I think we haven't seen much movement in the stock or options because this news is pretty well baked in already.