THE PRAGMATIC CAPITALIST » » CALL OPTION SURGE POINTS TO A MERGER MONDAY FOR RED HAT….

CALL OPTION SURGE POINTS TO A MERGER MONDAY FOR RED HAT….

1 October 2009 by TPC 6 Comments

The rumor mill is swirling around shares of Red Hat today as out of the money call option volume surges. The November 35s and October 30’s are both seeing unusual action – action which could only imply a massive potential 30%+ surge in shares in a very short period of time. Do the math on that and the only reasonable explanation is a merger Monday on the horizon. The buyer? Supposedly IBM….

RHT – Red Hat, Inc. – A sharp rise in the software company’s option implied volatility reading pushed the RHT ticker symbol onto our ‘top option implied volatility % gainers’ market scanner this morning. Shares of the firm have slipped 1% lower to $27.36, but the increase in volatility suggests investors expect greater fluctuations in the price of the underlying shares going forward. Volatility surged 21% from an opening reading of 38% on the stock to the current reading of 46%. Investors dabbled in near-term call options on Red Hat, making predominantly bullish plays, despite the decline in shares today. Nearly 4,000 calls were picked up at the October 30 strike for an average premium of 33 cents apiece. Investors holding these contracts hope to see shares rally at least 11% from the current price to surpass the breakeven point at $30.33 by expiration this month. Bullishness spread to the November contract where traders coveted some 3,000 calls for about 1.04 each. Finally, the higher November 35 strike had 1,500 calls purchased for an average premium of 19 pennies per contract. Investors holding the higher strike calls will begin to accumulate profits if Red Hat’s shares rally 29% to $35.19 by expiration day in November.

Source: IB

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6 Comments »

Divided States of America said:

Maybe the SEC should be preemptive and look into this

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# 1 October 2009 at 10:56 AM

TPC (author) said:

They would be wise to let it materialize first You don’t catch the drug dealer BEFORE he deals the drugs….

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# 1 October 2009 at 11:00 AM

jt26 said:

Did anyone see that article about Susquehanna International Group? When I see the Nov 35 buying I can’t help but think of them pulling up their sheet of tech takeover candidates (“the race card”) and sprinkling (literally) $100k duffle bag bets on win-place-or-show up and down Jersey horse tracks. Maybe now with OTB they can use VISA (ahh, second thought, they’re doing the same thing with Red Hat … ).