Wednesday, January 12, 2011

Emulex (ELX) - Stock and Vol Pop on Takeover and Legal Spec

ELX is trading $12.59, up 3.6% with IV30™ up 5.5%. The LIVEVOL® Pro Summary is below.


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This is an interesting lawsuit and takeover story.

The company has traded nearly 9,500 contracts in the first 45 minutes on total daily average option volume of just 1,715. All but 69 contracts were calls yielding a 136:1 call:put ratio. The action is in the Feb 13, Apr 13 and Apr 14 calls. The Stats Tab and Day's biggest trades snapshots are included (below).

Here's a quick review of some news. This is from 12-22-2010 (AP):
NEW YORK (AP) -- A U.S. District Court handed down an interim ruling in Broadcom's patent infringement case against Emulex Corp., defining which of Emulex's products potentially violate the chip maker's patents.

Judge James V. Selna issued his "favorable claim construction" ruling on Friday, which Broadcom announced on Wednesday. The ruling defined the scope of the alleged infringement and found that Emulex's OneConnect family of host bus adapters and fibre channel switches, used in networking equipment, possibly violate nine Broadcom patents.

Broadcom is a leading manufacturer for the chips used in everything from cable boxes to cell phones.

The Irvine, Calif., company is seeking damages and an injunction against Emulex, which is based in Costa Mesa, Calif. A trial is expected in September of 2011, said a Broadcom spokesperson.

Two months before it filed suit against Emulex, which makes data storage equipment, Broadcom attempted a hostile takeover of the company but eventually dropped its bid.
Source: AP: Broadcom gets favorable ruling in Emulex suit

So a takeover and law suit embedded in the vol.

The Options Tab (below) illustrates that the calls in both months are mostly opening (compare OI to trade size). We can also see that Feb and Apr vol are up 2.6 points while Jan is actually down small.

The Skew Tab snap (below) illustrates the vols by strike by month.

The Feb and Apr skew is pretty flat, Jan shows an upside skew.

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).

We can see the stock pop today. Also note how the IV30™ has gone past the HV180™ and HV20™. In English, the short-term implied vol is now above both the short-term realized vol and the long-term realized vol.

Possible Trades to Analyze
1. Call spread inter-month:
Sell 1 Jan 14 call @ $0.10 (there is liquidity there) (~61 vol).
Buy 1 Apr 13 call for $0.85 (~48 vol).
If the stock explodes pre-Jan expo, the dime sale will feel foolish, but at least the spread will be a winner. If the stock stays below $14, then a sale of the Feb 14 calls @ $0.15 will reduce the net debit to $0.60. Finally, if the stock stays below $14 on Feb expo, a sale of the Apr 14 calls can reduce the net debit even further. This trade gives over 3 months of upside with a declining net debit throughout. Of course, if the stock goes down, the 14 calls may not be around to sell.

2. Put Spread inter-month:
Wanna play the other side?
Sell 1 Jan 12.5 put @ $0.25 (~42 vol)
Buy 1 Feb 13 put for $0.90 (~35 vol)
If the stock stays above $12.50 on Jan expo. then a sale of the Feb 12 put can reduce the debit again.

This is trade analysis, not a recommendation.

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