One of the interesting stories coming out of the Fiscal Cliff is the juggling of cash positions that is occurring among many of the high market cap companies that produce a lot of cash.? We have seen ORCL accelerate their dividend, and we have seen nearly 100 other companies on the S&P 500 adjust their dividend schedule, announce a special dividend, or speed up dividend payments ahead of the cliff.? Today,? our COO Mark was asked about another major name, DELL, and how one might play Dell options.? You can watch the video here:
Josh was pointing out that skewness, the cost of puts relative to calls is low.? I think this is occurring more because calls are expensive than because puts are cheap.? We can see the “U” shape in Dell options on the skew chart below.
Livevol (r) www.livevol.com
There are all kinds of plays that make sense in Dell with that skew curvature.? However, we think the easy money is in playing for a change in the Div.? Dell is set to pay a Dividend on Dec 28.? We think that would be a perfect date for them to accelorate the next few quarters as well.
Livevol (r) www.livevol.com
With generally cheap puts, a possible special dividend and traders buying upside, we would normally look at a collar.? However, because the upside is so bid, we actually like doing a straight married put, sometimes called ‘puts and stock’ by old school brokers.? The trade looks exactly like a call in every way shape or form.?
With one exception:? this is the one way to profit if DELL does increase the dividend on Dec 28th, bot from the options themselves, but from the stock increasing with the pop in the stock.? Calls and Puts will be adjusted, and thus the cost of carry change will not help or hurt; however, the blast up in the stock, followed by an immediate unwind; could prove profitable.? To make matters better, since puts are cheap, these are options we do not mind opening.
The Trade:
By the Jan 10 puts for .25, buy DELL for 10.65, if the stock accelerates the div, sell the stock the next day it is announced.? We also think there are several other companies this trade fits over.