A higher bid is coming for Palm (PALM), or at least that is a theory still held by many. The Hewlett-Packard (HPQ) $5.70 per share bid for the smartphone maker is subject to shareholder approval, and just last night there were at least four public inquiries filed by law firms to look into whether shareholders were being offered enough.
The reality is that, without the thought of a buyout, Palm’s guidance on a standalone basis would have the stock down at 52-week lows and shareholders would be hoping for a real take-under rather than holding out much hope for a super-premium buyout.
The stock traded above $5.90 last night on the $5.70 offer. It was as high as $5.80 this morning, and is now around $5.75.
It is easy to argue that being long the stock has a mere 1% implied downside, but it also requires capital to be tied up, and on a percentage basis, would be far less of a return. So options are the way to go.
2 Palm Options Trades
The PALM May 6 Calls (UPY 100522C00006000) only cost 7 cents per contract, or a whopping $7 paid to have the upside of 100 shares on a fully leveraged basis. The PALM June 6 Calls (UPY 100619C00006000) cost 12 cents per contract, or $12 to have the upside of 100 shares.
Palm could see a higher bid from HP. Also, HTC expressed interest in the company, and others such as Samsung, Dell (DELL), Research In Motion (RIMM), Nokia (NOK), Ericsson (ERIC), Microsoft (MSFT), and even Cisco (CSCO), plus a dozen more overseas companies, could all be possible candidates. One could even argue that Google (GOOG) or Apple (AAPL) might make the move just to play defense.
But whether any other bids come might not even matter. There are going to be class-action suits filed here, assuming that has not already come about this morning.
Palm would be on a negative trajectory if it were not for the pre-buyout optionality that exists. The notion that this stock traded at $15, and then even above $18, is actually immaterial when you look at how much the landscape has changed.
Keeping that in mind, buying either of these options is an all-in trade. You won’t be scalping these in a day trade. Either a rival bid interest comes in or the rumor of one; otherwise these calls should just be allowed to expire worthless.
The May calls have three weeks until expiration, while the June calls give you about six weeks.
You have seen opportunities from us that were very profitable on the way down with PALM puts, and then on the way back up with front-month calls.
This is the endgame trade with low capital required and potentially high returns. Take your pick, a three-week bet or a six-week bet. And don’t kid yourself; this is nothing more than a bet. An all-in bet.
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