Options Trader Triples Money On Baker Hughes-Halliburton Deal
Shares of Baker Hughes Incorporated (NYSE: BHI) are on a roll after the company announced Monday that is has reached a definitive agreement to be bought by Halliburton Company (NYSE: HAL) for $78.62 per share.
At the time of writing, Baker Hughes was trading at $65.78, up 9.8 percent, but 16 percent lower than the offered price; Halliburton was down more than 10 percent at $49.10.
Jim Strugger, Derivatives Strategist at MKM Holdings, was recently on Bloomberg to discuss how the options market is viewing the deal.
"Well, the classic case of hindsight being 20:20," Strugger said. "If you go back to Friday, someone put a very large trade, they bought 62.5 strike calls in December, against that they sold 75 strike calls and then partially financed that position by selling 50 strike puts again all in December. He paid about $3.5 million for that position; lo and behold with the announcement today Halliburton buying Baker Hughes, that position has tripled."
According to Strugger, in the wake of recent turmoil in the global financial markets and Japan again flirting with a recession, US markets have mostly remained resilient. He feels that oil prices going down is creating some volatility in oil stocks, which is being seen in the options market.
The VMware Trade
Strugger also shared his trade on VMware, Inc. (NYSE: VMW). Shares are down more than 3 percent year-to-date and 14 percent in the last three months.
"The company has been a significantly underperformer, they have reported third quarter in October, stock traded down sharply because billions missed Street’s consensus," Strugger said. "It’s on a floor valuation, implied volatility near long term lows. We think what’s going to happen here is a government deal that didn’t show up in the third quarter will show up in the fourth quarter."
Strugger suggests an outright long trade on VMware by buying January 2015, 90 strike calls of the stock at nearly $2.30. He thinks that since the implied volatility for the stock is at its all-time low, naked purchase of call options in limited quantities is the least risky proposition to play the stock.
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