Monday, October 18, 2010

Seagate (STX) - Hidden Trade in Takeover Candidate

STX is trading $15.73, up 1.4% with IV30™ up 8.0%. The LIVEVOL™ Pro Summary is below.


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This is yet another takeover candidate. The stock gapped up from $12.69 to $15.51 on 10-15-2010. Eddy Altamirano found this one for me, and a very interesting trade. First some quick analysis, then the trade he saw.

NB: A second noteable trade in stock HAL is included at the bottom of this article without analysis, just a heads up. Darren Story of Student Options showed me that one.

The company has traded over 111,000 options on total daily average option volume of just 22,416. Calls have traded on a nearly 4:1 ratio to puts. Nov 15, 16, and 17 calls have traded over 45,000x in aggregate. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the action, note that Nov and Dec are bothup 4.3 vol points today.

The Skew Tab snap (below) illustrates the vols by strike by month. Here is where the peculiairty can be seen.

Check out the diveregence between the upside skews in Nov and Dec. The Nov 20 calls (for example) are 10 vol points higher than the Dec. There is some liquidity there as both lines have traded over 1,300x. So what?...

This is a takeover candidate and rumor has it that a Nov/Dec 20 call spread can get done (bought) for as little as $0.02. Not bad...

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

We can see the stock has shot up of late and the short-term realized has jumped well past implied.

Possible Trades to Analyze
1. Anything that costs $0.02 has a low probability of success, but the question is whether or not the payout is greater than the odds. STX has a 52 wk. high of $21.58. If that price were realized after Nov expo but in Dec expo, the $0.02 purchases would be worth $1.58 ($1.56 gain) or a 7,800% gain. If you feel the odds are better than 1/78 (1.282%) of that happening, then a $0.02 purchase may be a do. Kepp in mind STX can go higher, but also lower. It may get taken out for $18 (or whatever), and then this is a loser.

2. Maybe a Nov/Dec 19 call spread for $0.09 or Nov/Dec 18 call spread for $0.12 looks good. Though, penny for penny, substantially more expensive.

Keep in mind again, all of these trades are more likely to lose than to win, the question to answer becomes, are the odds better or worse than the payout.

When a trade like this pops up and professionals feel like the odds are significantly tilted in their favor, (for example if someone felt the odds were 1/40 that the 52 wk. is reached), they do these pretty big. BUT, I'm NOT saying this is one of them, I don't know. I'm actually home today sick, so do the homework yourself, just thought this was a cool idea from Eddy.

Since I can only post once today, here is some color from master broker Darren Story of Student Options to chew on as well:
HAL nov 30 jan 28 ps tied 34.05 cust paid .39 on 20,000x AMEX

This is trade analysis, not a recommendation.

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