After indicating with brokers across the street for shares in the VMware (VMW) deal, I was thrilled to get 3,500 shares out of the 30,000 or more shares I asked for. The IPO was priced at $29.00 and immediately began trading above 50. Yes, that’s right, $50.00. Keep in mind, this is in a market that is re-pricing risk and taking liquidity off the table. Now less than a month later, the stock has crossed $80 on an intraday basis and closed at $76.65.
You may be hesitant to trade the stock after such a strong run from the IPO (probably wise) since it is nearly 165% above the deal price, but there is another way to be involved without as much risk. Investors may not know that EMC Corp (EMC) is the primary seller and still holds 88% of the stock. So buying EMC is actually taking a position in VMW while getting the regular data storage business along with it. Also, investors have the ability to hedge a position in EMC while there are no options currently trading on VMW.
The numbers look like this. EMC holds 326 million shares of VMW. Right now, there are about 2,098 million shares of EMC outstanding so for each share of EMC, you get approximately 0.155 shares of VMW. With VMW trading at $76.65, this means that $11.88 per share of EMC is attributable to VMW. you are essentially paying $7.62 for the rest of EMC (since EMC is currently at 19.50). I would suggest considering a purchase of EMC here and then turning around and selling Oct 19 calls at $1.10. This yields 32% annualized assuming the stock is called away, and gives you some risk reduction as you get to keep the $1.10 premium if the stock drops below $19.
Volatile times call for creativity in taking positions and limiting risk. I think this is one of those attractive situations.
EMC Chart:
VMW Chart:
FD: Author has long position in VMW and EMC
EMC Corp. (EMC) Discount Skincare Shop Designer Skincare at Discount pricing!Name Brand Skincare Shop Designer Mens & Womens Name Brand Skincare!
September 12th, 2007 at 11:27 am
Hi Zach,
Lucky you to get some of those IPO shares. What is your strategy with the actual VMW? Will you sell it and/or what would make you sell it? a price level, % gain? etc. Its Price to Sales is astronomical…
September 12th, 2007 at 1:18 pm
Nucor starting to feel the noise…
consumers pulling back on homes and autos… any steel maker facing solely domestic market instead of international is gonna feel some pinching… good call earlier.
The sheet market has suffered from lackluster demand in the automotive and residential construction markets, including appliances and HVAC, Charlotte-based Nucor said Wednesday.
“On the supply side, while the latest data suggests a strong slowing of imports in August, stubbornly high imports through the first seven months, particularly from China, continue to impact both pricing in the marketplace and customer inventories,” the company said. “While both imports and inventories are down significantly from their peaks, they did not fall far enough during the end of the second quarter and through the midpoint of the third quarter to support improving pricing opportunities during the third quarter.”
September 13th, 2007 at 5:23 pm
You sir are an idiot. VMW does have option.
For one, Sept option is not expired yet and you counting 1.5 months to OCT expiration. Assuming that the stock get called out, how do you guarantee the annualize return. I hate people using annualize. You are assuming that you can do this every month without any risks.
September 13th, 2007 at 8:44 pm
Hey Mike, I took profits on part of the position and am holding a small piece for now waiting to see how momentum continues. It’s expensive, but that’s how small growth stocks typically trade when the story is good.
Trader… There have now been options listed for VMW which were not initally available. You are definitely correct in pointing that out. There are September, October and January options available for EMC. Hopefully you understand that investors can choose to trade any of these options and do not have to wait for September expiry to end before trading October options.
Standard industry practice is to annualize an investment with a fixed time horizion. 3 month CD’s are typically quoted in annualized terms. I in no way expect a “guaranteed” return of 32% either for the 36 days left till October expiration or through a full year of putting on similar positions. I am simply stating that IF EMC is bought at this price and holds up above the strike price through October expiration, the annualized return would be 32%. Hope that clarifies the situation.
September 16th, 2007 at 5:55 pm
i agree with you that emc looks like a buy here. but why selling 19 calls, which are in the money already and you therefore have no upside exept the premium minus the “in the money” amount which is 60 cents, since that was the opening on the day you wrote this.
all in all you are risking all the downside in order to cash in 50 cents per share in premium, not a good deal i would say.
and the reason to play emc just because of the vmw story is a bid risky, i guess you listen too much to cramer since such calculations are that easy, bear in mind that vmw will go down as soon emc starts to sell their stake.