Wednesday, April 28, 2010

Rambus (RMBS) - Trading a Lawsuit

RMBS is trading 24.26 with IV30™ at 52. The LIVEVOL™ Pro Summary is below.

The company has been, and is in the throws of a huge lawsuit. Originally it was with three companies - Micron (MU), Hynix Semiconductor and Samsung. Rambus settled with Samsung in Jan of this year - details below:

Jan 18, 2010
Click Here for Reference.
Samsung Electronics Co. agreed to pay as much as $900 million over five years to Rambus
Inc. as part of a deal to settle some high-profile litigation focusing on memory chips.

You can see the pop in the stock after (click to enlarge):

Barrons came out with a great story relaying what's at stake and possible outcomes.
Click Here for Reference.
Rambus (NASDAQ: RMBS) has recently settled a patent case with Samsung. The company is also currently involved in separate lawsuits worth $12 billion against Micron Technology
(NASDAQ: MU) and Hynix Semiconductor. Investors are bullish about the outcome of these

According to a report released by Barron’s, the stock is expected to grow by 100% in the
case of a positive outcome. However, the chipmaker has a bleak scenario if its lawsuits
fail. Harold Hughes, CEO of Rambus, said, “We do not intend to give Hynix or Micron a deal comparable to the one we gave to Samsung."

Yup - the stock could go to "zero" or double if there are "extreme" judgements. Let's take a look at the Skew Chart Tab first (click to enlarge).

A few things to notice:
(1) The front month (red) ATM straddle is way below the other months. This implies that the options market is pricing a decision after this expo.

(2) The front month skew is parabolic and as expensive (or more) as the other months. This happens when the possibility of an extreme event still exists - so extreme options just don't go down until they expire worthless - sort of static prices.

(3) There doesn't seem to be a particular lean one way or the other in the skew - i.e. no "market leans" as to the outcome.

(4) August skew (green) is flat relative to May (red) and Jun (yellow).

The Options Tab snap (click to enlarge) also demonstrates some cool stuff.

Just in general - the vol looks pretty low for such a huge event. Jun ATM straddle is trading on 64 vol - or ~$4.55 fair value. Feels kinda cheap. Keep in mind, this case has been heard before and there have been all sort of delays... But still...

You can see the vol by month below (click to enlarge).

You can see all the back months hover around the low 60's - so it's not just a "delay" that's priced. If it were, the vols would increase over time. It looks like maybe a settlement or other type of non "huge" news is priced in.

A Few Ways to Analyze Some Trades
1) One trading approach could be to sell the front month ATM straddle @ $2.18 (ish) with the hope that the event doesn't come out this cycle (ending 5-21-2010). Buy the back month ATM straddle for ~$4.60 to cover for a total debit of $2.42.

At expo you'll probably have a straddle worth more than $2.42 in the back and you can sell it, or spread it off, or just hold it in anticipation of a move.

Of course - you would be selling the lowest vol possible in the entire chain and buying the most expensive ATM straddle by doing that - so that might not taste so good.

I think there are a bunch of similar strategies where you could sell better vol (but in the front) and cover up (please cover up) with cheaper else where. There is some action expected in the international courts (I think) on 5-24-2010 - just be aware as this is an international story.

2) Another is simply to buy some straddles in the further out months. I mean, if this thing is supposed to move huge - 60 vol feels cheap. You can spread that straddle off with some expensive wings.

3) Or the total opposite... Sell the juice in the middle and buy the wings to protect. The Skew tab shows the third month (August - in green) wings aren't very expensive relative to the meat - it's sort of flattish in shape relative to May and Jun. If you think this is going to be a bunch of nothing - as it has been before - maybe this approach is better.

4) Always have this one... Just watch and try to learn. There's noting wrong with sitting it out.

This is trade analysis, not a recommendation.

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