Hi Steve,
Here is yet another outlook on the COMS to PALM spinoff
OptionsWatch
3Com bulls are running
Front month call interest peaks ahead of spinoff
By Jody Brennan, CBS
MarketWatch.com
Last Update: 7:55 PM ET Jul 10, 2000
NewsWatch
Latest headlines
SAN FRANCISCO (CBS.MW) -- Options traders have turned
especially bullish on 3Com in the last few trading days, as the
company prepares to distribute its remaining holdings of Palm to
shareholders .
Since last week, market makers in 3Com have been raising
volatility in out-of-the-money calls, from the mid-60s last week to
about 70 on Monday, which means that options traders are
interested in buying. Most popular Monday were any front month
calls under $2 -- cheap July 60s, 65s and 70s.
Calls give the holder the right, but not the obligation, to buy the
underlying security at the specified price. Because shares of
3Com are currently trading under 56, calls giving holders the
right to buy the stock at 60 or more are "out of the money."
Recent action suggests that traders obviously think that currently
3Com (COMS: news, msgs) is undervalued. The stock fell 15/16
to close at 55 7/8 Monday.
On Tuesday 3Com will establish the ratio of Palm (PALM: news,
msgs) shares to be distributed per 3Com share. The distribution
will be made to shareholders on record as of July 27.
Palm, a unit of 3Com that makes popular hand-held computing
devices, went public earlier this year in a widely anticipated IPO.
The parent company said it would distribute its remaining
holdings as part of a restructuring plan.
In June 3Com posted a fiscal-fourth-quarter loss of 42 cents a
share, but that didn't chase away many long-term bulls on Wall
Street.
"The quarter was a little better than what people expected," said
Chris Sessing, an analyst with Los Angeles-based Crowell
Weeden. "They're taking one step back to take two steps
forward. Instead of being a larger, more stagnant company,
they'll be a smaller one with higher growth prospects."
Because so few shares of Palm are available, options traders
are having difficulty borrowing shares to hedge "short put" or
"long call" positions by selling stock. This causes the 3Com puts
to be more expensive than the calls, which is unusual. See
earlier story
That hard-to-borrow status will disappear after July 27.
But the when-issued contracts -- which represent Palmless,
3Com shares - have opened yet another chapter for options
traders looking to make money on the companies' divorce.
Pre-traded "when issued" contracts (symbol COMSV), or "when
when issued" contracts, have already started trading
over-the-counter and the market is now pricing these contracts at
around 13 3/8.
However, based on the current price of 3Com and Palm, these
3Com shares (or when issued contracts) are being priced at
around 10 3/8 a share, or about $3 less.
Although Palm stock is hard to borrow, traders could buy 3Com
(COMS: news, msgs) stock, sell 1.5 shares of Palm stock and
sell 1 COMSV contract. If this is the case, then traders should be
able to lock in nearly $3 every time the arbitrage is made.
Stumped? So are a lot of other people, so here's how it works,
including the calculations.
3Com will spin-off the remaining 532 million Palm shares it owns
(or about 94.2 percent of the outstanding common stock of
Palm) in late July.
Palm traded recently at 30 5/16, which puts its market
capitalization at around $17.3 billion. Since there are 1.5 shares
of Palm for every share of 3Com, the value of Palm for every
share of 3Com is now about 45 1/2.
3Com recently traded at 55 7/8, and if you subtract this 45 1/2
valuation, you see that the market is pricing Palmless 3Com at
about 10 3/8.
Trading of the when-issued contracts is open to everyone and
the over-the-counter contracts will have the same privileges as
those formally listed by Nasdaq Tuesday. Also, all COMSV
contracts will settle in the same bucket; the settlement date to be
determined by Nasdaq.
3Com closed down 15/16 to 55 7/8. Palm shares were skimmed
to 30 5/16.
Hope this helps
Bernie |
