Think the Dell Buyout Fails? Here’s Your Play

by Tyler Craig | January 16, 2013 9:31 am

Shares of Dell (NASDAQ:DELL[1]) soared 21% over the past two trading session on news that the PC maker is a buyout candidate[2]. The company reportedly has been in talks with Silver Lake Partners and other investors for a potential leveraged buyout at $13 to $14 a share — a 20% to 30% premium from Monday’s low — and a source close to the negotiations says a deal could emerge within six weeks.

Interestingly, the recent price surge has driven shares of Dell to extremely overstretched levels. In fact, according to Bespoke, Dell is now the most overbought stock in the S&P 500 Index — while Apple (NASDAQ:AAPL[3]) is the most oversold.

What a wonky market we live in nowadays!

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The boost to Dell couldn’t have come at a better time, as the beleaguered technology company had recently fallen more than 50% from its 2012 high of $18.36. Of course, the timing of such negotiations shouldn’t be all that surprising, as most buyout deals don’t usually occur until share prices — and thus valuations — have sunk low enough to attract would-be buyers.

With the deal expected to be struck around $13 to $14 a share, it appears as if the denizens of the Street are quickly pricing in a successful resolution to the negotiations — Dell closed at $13.17 in Tuesday’s trading session. In the off-chance that talks fail, then, Dell could very well give back a large portion of its recent gains.

If you want to position yourself to profit from a failed deal, here’s an option trade that will do just the trick.

Speculators looking to exploit a downturn in Dell could purchase the May 13-11 put spread for 74 cents. The vertical spread offers a limited-risk avenue for betting shares of DELL will return to their pre-buyout surge price of $11. The max loss is limited to the initial 74 cents paid and will be incurred if DELL remains above $13 by May expiration. The max reward is limited to the distance between strikes minus the initial debit, or $1.26, and will be captured if DELL falls back below $11 by May expiration.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

  1. DELL:
  2. PC maker is a buyout candidate:
  3. AAPL:

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