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Dell Inc. (DELL) Option Trader Eyes a Better Buyout Deal

DELL's weekly calls and puts are used to initiate a short straddle

by 2/19/2013 1:09 PM
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Amid this month's take-over talk, Dell Inc. (NASDAQ:DELL - 13.82) remains a popular topic in today's session, as the personal computer concern prepares to report earnings after tonight's close. In the options pits, though, one bold investor may be hoping for a higher buyout bid.

Jumping right in... Around 10:30 a.m. ET on the Chicago Board Options Exchange (CBOE), one block of 1,000 2/22 14-strike puts crossed the tape near the bid price for $0.21, while a symmetrical block of 1,000 2/22 14-strike calls simultaneously changed hands at the bid price of $0.05. In other words, it appears a short straddle was established for a net credit of $0.26.

In the best-case scenario, DELL will finish the week -- when these short-term options expire -- right at $14, allowing the trader to pocket the full potential profit, or $0.26. However, the straddle can still be profitable, as long as the stock is trading between the breakeven rails of $13.74 and $14.26 (strike price minus/plus the net credit) by this Friday's close. On the risk side of the play, losses are capped at $13.74 should DELL tumble to zero through week's end, while they are theoretically unlimited above $14.26.

As mentioned, DELL is unveiling its quarterly results after tonight's close, and a stock can sometimes experience lofty price swings on the heels of a scheduled announcement. However, with the current buyout bid at $13.65 per share, and a slew of notable investors calling for a sweeter deal, the straddle trader could be gambling on a higher per-share offer to take DELL private. Today's spread strategist could also be hoping for a post-earnings drop in volatility, which also tends to accompany a planned event.

In today's session, the stock is hovering around breakeven, and was last seen trading at $13.81. For the year, DELL has added an impressive 36.2%.


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