Palm (PALM) bounced a little bit today after it announced that AT&T (T) would carry its Pre and Pixi models, but the company is far from being saved. Sprint Nextel (S) and Verizon (VZ) already carry the company’s smartphone devices.
One near insurmountable problem exists for the company. The cool phones are now the Apple (AAPL) iPhone , the various Google (GOOG) Droid models, and the BlackBerry from Research In Motion (RIMM).
A poor earnings report and additional warnings last week were cruel to shareholders who insist on clinging to this diminishing asset.
If you’ve read any reports on Palm in the past week, it is nearly impossible to get excited about the stock.
It has not been long since our March 4 recommendation to short the stock via the PALM May 5 Puts (UPY 100522P00005000) at 40 cents. Those puts closed at $1.48 Friday, and are trading at $1.33 today since Palm’s pop on the AT&T news.
The optionality and time value are now going to start working against holders of these contracts in a market-neutral or price-neutral strategy. In short, the easy money has been made.
Now here is the risky be: Palm could be acquired. The question boils down to when and at what price.
You have to remember one thing about takeovers: Some are “take-under” strategies. A buyer may wait for more pain to come into play or until the company is close to the verge of bankruptcy.
And then there is the ultimate risk: Palm could just die.
But the Palm operating system and other intellectual property does have some value. What that value is will be very hard to call. It is probably too soon to begin nibbling into any longer-dated call options. But the easy money has been made in our put play in just two weeks. After all, a 200% gain in May options is not too shabby.
We are looking at the longer-dated put and call options for a strategy here. The PALM Aug 5 Calls (UPY 100821C00005000) at 57 cents are not yet cheap enough, and the PALM Jan 2011 5 Calls (ZTO 110122C00005000) at 97 cents are also too rich.
The stock on its own is likely to fall, but those premiums require too much accuracy and too much crystal ball reading to make an attractive risk-reward play today.
If you took a significant profit in the put trade, the best thing may be to take the outlier bet. A buyer may be chomping at the bit to buy the company to keep it out of a competitor’s hands. That being the case, the closest outlier bet is the PALM April 5 Calls (UPY 100417C00005000) at 14 cents. There is no reason to bet the farm here; nibble away at these. That option on a static basis should lose about 3 cents per week with PALM around $4.05 today.
Palm has been a wild ride. You should be looking for a way to play a buyout, but keep in mind that the chance of any deal in the very near term is small. More pain has to come in the world of distressed M&A.
Who might buy? Well, that could be Microsoft (MSFT), Nokia (NOK), Ericsson (ERIC), Samsung, Dell (DELL), Hewlett-Packard (HPQ), or several other contenders.
Some investors may even convince themselves that Motorola (MOT) could be a player here.
With Palm’s market cap of close to $700 million, there is still some risk here despite its most recent cash position.
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