11 FEB 2013
Today, Dell closed slightly above the buyout offer price of $13.65. I've observed a lot of buyouts and have been fortunate enough to benefit from a few. Rarely have I seen a stock run up so quickly after the buyout announcement to and through the buyout offer price. Also, rarely have I seen options trade as they have with Dell, recently. Usually, when the stock price goes up, the put prices go down. Usually call prices move in the opposite direction of puts. Lately, with Dell, the usual patterns haven't held.
Last week, I sold 13 AUG DELL puts for .25. The stock has since appreciated from about 13.40ish to about 13.70ish. The 13 AUG Dell puts? Breaking the typical inverse movement to the stock price, they appreciated, too--selling for as much as .37, today! I sold some more for .33. Simultaneously, DELL call prices rose, which made sense since the stock prices were rising. The puts and the calls were moving up, together--rare.
What's going on? Here's what I think. Some big investors in DELL aren't happy with the buyout offer. The media have reported that many of DELL's largest holders have cost bases higher than the buyout price. Of course they won't be happy! Accordingly, they are doing what is rational--trash talking the deal and making all kinds of threats about appraisals, proxy fights, and litigation. They are to be taken more seriously than the usual fusillade of investigations by plaintiffs' firms that accompany any buyout.
So some speculators think that these unhappy, powerful shareholders will force a higher price for the deal to go through. Thus, these speculators are bidding up the shares through the buyout offer price. Others of these speculators are buying cheap calls--say 14 APR and MAY calls. At the same time, some speculators are concerned that the unhappy shareholders may kill the deal. Thus, they sell puts against their long positions. As they buy at prices near, equal to or greater than the buyout price, they want some downside protection and buy puts. Thus the put prices go up, even though the share price has gone up.
What do we know? We know that a team consisting of Michael Dell, Microsoft, and a PE firm did homework to determine that the shares are worth at least 13.65. We know that a host of others believe the shares are worth much more or at least they are putting on a good show to try to squeeze more out of Michael Dell and friends. Will they squeeze more out of Michael and friends or put together a higher bid? That's what the longs are betting on with their long stock positions and cheap calls. However, they are betting on the unknown so they buy puts at 13 or lower. Their accommodating put seller is betting on what is known--Dell is worth at least 13.65. If there is a bidding war--all the more security for the put seller. In the unlikely event that a deal is not consummated and the share price falls, the put seller may be forced to buy shares at 13 minus the premium collected--a price below the well researched minimum value of the company. If the deal goes through as is, the put seller will have been sitting on his put premium the whole time. While the put seller's returns are low, likewise is his risk low. In Dell's case, I've chosen to take my low risk, low return based on what is known versus speculating on what is unknown. And yes, all of my puts on Dell are cash secured.