DYN – Dynegy Inc. – The announcement by Blackstone that it was making a $4.50 a share bid for the power generating company created a groundswell of demand for shares in Dynegy, which rose 60% pennies short of the deal price. Options volume quickly eclipsed the overall reading of open interest at Dynegy when two tranches of 10,000 lot call options were scooped up by speculators wondering whether there was more upside juice for its stock price. An investor had no second thoughts in paying 50 cents for 10,000 calls expiring in September granting the investor buying rights at a fixed $4.00 per share. He shouldn’t lose too much assuming the deal proceeds. But according to the terms of the agreement, Dynegy now has 30 days to shop itself to other buyers, which is likely why the obsession with options today. The call buyer has the right to get bought out at $4.00 although would be sour if the share price at expiration was below the deal price. However, now that the company is on the bidding block, the option owner faces a plausible boon if other parties express a good old-fashioned joust to court management. This investor may be thinking the sky’s the limit looking at the recent performance for Dynegy’s shares, which have trickled down steadily from a peak at $13.00 last Fall. A similar but more aggressive purchase of December options was also evident in hectic trading as an investor scooped up 10,000 more call options this time at the $5.00 strike where premiums ranged between five and 10-cents per contract. A buyer might see unlimited upside potential if willing to spend the relatively small premium. But the cost of the trade may turn to a wasted loss in the event that Blackstone remains the only knight on the scene.
Affiliation: Interactive Brokers
Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.
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