Monday, December 6, 2010

Radware (RDWR) - Stock Gaps on Takeover Rumor... Again...

RDWR is trading $39.09, up 19.3% with IV30™ up 8.9% on takeover rumors. The LIVEVOL™ Pro Summary is below.

I found this company through Top Scans --> High Option Volume. A snapshot is included below.

Here's a quick news snippet:
[RDWR] jumped as much as 23 percent after Israeli newspaper Calcalist reported Riverbed Technology Inc. may seek to acquire it...

... HP, based in Palo Alto, California, is also in talks to buy Radware, according to Globes, another Israeli news service.

Source: Bloomberg

The company has traded nearly 24,000 contracts on total daily average option volume of just 5,498. Over 20,000 calls have traded, yielding a 6:1 ratio to puts. The Dec 40 calls active with over 6,700 having traded.The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates action. We can see the Dec vol is up 13.2 points while Jan is up 4.1 points and Mar is actually down 5.6 points. Note how the back months are all priced below 50 vol, with the leaps in the 30's.

The Skew Tab snap (below) illustrates the vols by strike by month.

We can see that Dec is well above Jan. It is interesting to note that the skew is not very bid to the upside in Jan, and is somewhat muted in Dec given the news and stock move. I've included the Skew Tab as of Friday (just Dec) and we can see a much greater skew to the upside.

With this stock move up, the options market now reflects less upside risk (demand).

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock has gapped twice of late, once from $27 to $38, and today from $33 to $39.

Possible Trades to Analyze
1. For the small bets which potentially a big upside but low probability of success, look at the Dec 33 puts. A purchase there small for $0.15 seems reasonable, and bets on some sort of news that reverses today's move. Those puts closed ~ $1.90 on Friday.

2. If you think the stock will stay here (ish) for Dec and who knows after, analyze a calendar spread.
Sell the Dec 39 straddle @ $4.15 (or Dec 37/40 strangle @ $2.70)
Purchase the Jan 37/40 strangle for $5.20.
These trades sell 77 vol (ish) and purchase 60 vol (ish) and bet on a muted move from the current price through Dec expo. This trade is long the back month (which is long vega), so a definitive takeover announcement crushes this trade.

3. If you feel this stock will trail back down a bit but not a lot, try a Jan/Dec 36 put spread and pay $1.30. This purchases 62 vol and sells 73.

4. For a straight bullish play, purchase the Dec 40/45 call spread for $1.35. That's MaxGain:MaxLoss of 3.65:1.35 or 2.7:1. This spread requires RDWR to close above $41.35 if held to Dec expo.

5. Play it contrarian, sell the upside.

This is trade analysis, not a recommendation.

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