Thursday, June 2, 2011

Brocade Communications (BRCD) - Vol and Stock Pop on Dell Takeover Rumor

BRCD is trading $6.99, up 4.7% with IV30™ up 15.4%. The LIVEVOL® Pro Summary is below.


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Brocade Communications Systems, Inc. (Brocade), incorporated on August 24, 1995, is a supplier of networking equipment, including end-to-end Internet Protocol (IP)-based Ethernet networking solutions and storage area networking solutions for businesses and organizations of all types and sizes, including global enterprises, and service providers, such as telecommunication firms, cable operators and mobile carriers.

The stock and order flow are moving on a nice article posted by Forbes. Here are some snippets:
Is Dell shopping for a networking equipment company to buy?

Canaccord Genuity analyst Paul Mansky thinks so. In a research note this morning, he notes that Dell “has been busily assembling a full IT stack aimed at realigning the company away from secularly less attractive legacy businesses (like PCs) and incrementally toward future growth in the enterprise.”

[He] thinks Dell will be shopping for a networking company, and soon, for several reasons:

•The PC market is arguably headed into an accelerating secular decline (units and ASPs) at the hands of tablets – Dell’s cash engine.
•Dell has clearly been seeing success cross-selling Ethernet switching with servers and storage, evidenced by reported results and qualitative commentary from Dell executives.
•Dell’s this week made a shelf filing for a potential $3.5 billion debt filing; the company also has $7 billion in net cash.

Mansky says his bet is that Dell with bid for Brocade, a company he rates a Buy with a $7.50 price target; he thinks Dell; could pay as much as $10 for the company.

Source:Will Dell Buy Brocade? written by Eric Savitz.
Compelling stuff. Having said that, BRCD hit as high as $7.20 and as of this writing has actually broken to $6.90. The company has traded over 61,000 contracts on total daily average option volume of just 11,213. Calls have traded on a 3.7:1 ratio to puts. The most active line is the Jul 8 call, where over 25,000 have traded. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the Jul 8 calls are mostly opening if they're on the same side (compare OI to trade size). We can also see that the Jul 7 calls have an existing OI of over 32,000 -- with ~ 10,000 of that opening yesterday.

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

The skew is upward sloping to the OTM calls for both of the front months. I've highlighted the Jul 8 calls (the ones trading today). I looked back at BRCD skew for the last 3 months and in general, it's upward sloping to the OTM calls. I randomly selected 4-15-2011 and included it below to illustrate the point.

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 after a steady rise since mid April. We can also see the IV30™ pop -- quote substantial. Finally, we can see that IV30™ has traded elevated to the HV20 and HV180 (the short-term and long-term historical realized vols) for a couple of months, now.

Possible Trades to Analyze
Given the upside skew and elevated front month to the second (and third months) -- a calendar spread or diagonal calendar (to pick up deltas) seem like interesting trades to examine. Owning Oct and selling Jun, then Jul (after Jun expo) is one way to have a prolonged exposure to a potential takeover while slowly lowering the amount risked with subsequent vol sales.

Of course, given that BRCD has had the upside skew for a while with no takeove as of yet -- this might also be a head fake... again...

This is trade analysis, not a recommendation.

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