DELL Options Strategy - LBO

Discussion in 'Options' started by Denver Vol, Apr 4, 2013.

  1. As many of you may know, Michael Dell is in the process of mulling offers to take his company private in order to implement his restructuring plan that he believes would damage the stock price if undertaken while public.

    Currently there are 3 known offers on the table:

    (1) Michael Dell + Silver Lake: $13.65/share
    (2) Blackstone: $15.50/share (roughly)
    (3) Carl Icahn: $21.50/share (he likely hasn't offered that, but is trying to obtain it for shareholders, notably, himself)

    Current stock price: $14.25/share
    Pre-LBO discussion stock price: $9-10/share

    So here's my proposal - given that the current stock price is lodged between the various offers, would a straddle be advisable here?

    Attached is the May 18 DELL options chain as of this morning (market hasn't opened yet, so let's just use the last trade prices for now).

    Let's start with:
    May 18 $14.00 Call ($0.42)
    May 18 $14.00 Put ($0.16)

    Assuming a $14.25 share price, your break-even points at expiration are $13.42 and $14.58. The following outcomes are available, barring new developments:

    i. Silver Lake deal - strategy loses money b/c stock goes to $13.65
    ii. Blackstone deal - strategy makes money as stock goes to $15.50
    iii. Icahn deal - likely makes money as his valuation suggests something much higher than $15.50
    iv. deal called off and strategy makes money as stock reverts to $9-10

    Alternatively, what if you bought:
    May 18 $14.00 Call ($0.42)
    May 18 $15.00 Put ($0.80)

    Now your break-even points are $13.78 and $15.22 (I believe).

    In this scenario, all of the above outcomes make money. Is there a name for a strategy where you buy a call and a put where the call strike is lower than the put strike?

    It would seem that unless new offers hit the table, or the Silver Lake deal get negotiated up into the $14 range, DELL stock seems to be headed to $13.65 or $15.50+.

    Personally I think Michael Dell is going to do anything possible to get the Silver Lake deal through because it offers him the most management latitude for himself.