Tuesday, December 1, 2009

Sun Microsystems (JAVA) - Straddle Trades; Bet Against Deal?

JAVA is trading at around 8.38 as of ~12:30 EST on Tuesday. You can see the Livevol Pro Sumary below.

ORCL is trying to take over JAVA for $9.50 (see Corporate Action window below - click to enlarge). So why is it trading over 10% below the deal price?

The EU seems to be taking exception to the ORCL takeover - the saga has gone on for quite some time. Essentially the EU sites anti-trust violations and are attemptiong to block the deal. The back and forth has gotten quite heated of late.

I saw from the Company Tab (below) that 7,500 Jan 9 straddles were purchased on the offer for $1.02. You can see the Company Tab biggest trades below (click to enlarge). The Options tab shows that over 8,200 in total have traded (also click to enlarge).

So what? Well, if someone is paying $1.02 on the 9 strike - they break even above $10.02 and below $7.98 for that long straddle.

Well, they probably aren't betting on a higher takeover price - so it's an $800,00+ bet that the deal falls apart as I see it. It is possibly betting another suitor - not ORCL - that will not get blocked is coming in with a higher price than ORCL's $9.50... Might just be a vol bet if deal gets less and less likely and vol spikes... Interesting... All wins in this one bet on a dramatic change.

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