Shares in Lehman Brothers bounded sharply out of the gate today, up 13% to $15.51 on speculation of a possible takeover by Korea Development Bank. The move in Lehman comes a day after respected analyst Richard Bove floated the notion of Lehman's vulnerability to a hostile takeover bid given the dissonance between management and the market's view of the company's value, and amid generally bullish action in financials today on back of interest rate-dovish and largely reactive, rather than proactive, rhetoric from Fed Chairman Ben Bernanke speaking in Jackson Hole, Wyo.Response from option traders has been interesting, not least in the October contract, where a trader appears to have played against the "easy-fix" rumors by buying a long 8,870-lot put spread between strikes 2.50 and 5.00. This trade was entered for a 25-cent debit, creating an initial break-even of $4.75 - requiring an almost disastrous $10 drop. The trader stands to gain as much as $2.25 -- 9 times the money at risk -- if Lehman shares make a cataclysmic drop but don't break below the $2.50 level. Given that options are pricing in only about a 3% chance of Lehman shares dropping below $5 by Oct. 17 -- and virtually no chance of a bust of $2.50 -- it's clear that this trader is using this 25-cent position as a long-shot wager.
In another October play in Lehman, traders may have sold 27-strike calls at 22 cents apiece in order to fund a long collar between strikes 12.50 and 20 -- a protective play on an underlying stock position that would otherwise cost 33 cents to put on. In this case, the trader would have bought the put at the 12.50 strike and sold the call at 20, with that short call declaring a limit to any upside in which this trader can participate. This too would seem to suggest a very muted outlook for Lehman shares, even if a bid is forthcoming.
Elsewhere, we observed a few large-scale call-side trades in tech stocks. Options activity in Sun Microsystems -- trading 0.60% higher at $10.00 -- caught our attention, as a trader bought an 11,000-lot long call position at the January 12.50 line for 53 cents. About an hour later, a trader sold a 10,000-lot position in 12.50 puts for $2.90. Both of these strategies may be interpreted as bullish on the underlying share price, as Sun shares have not traded at this level since June.
Read More
