Tuesday, December 26, 2006

Is FDC As A LBO Candidate A Good Play?

I want to preface this post by saying that I've done my fair share of chasing for the next buyout target and let me tell you, the odds have typically been against me. Having said that, I do like a couple of things from a trader's standpoint that make FDC an interesting longer term play regardless.

1. The fundamentals seem to support what Reuters posted
US CREDIT-First Data spread weakness to persist on LBO fear
(Thu, Dec 21) that "First Data has excellent cash flow and some high margin business", said Dave Novosel, analyst at New York-based Gimme Credit. The company also has different business segments that could be spun off or sold, he said.

2. A lot of technical support at the $24 level going on since late Oct as evidenced by the chart below:

3. The August ATM Call option IV levels are close to 52 wk lows of 22% which after a nice collaspe of IV due to a recent earnings annoucement makes for a potential IV hike if and when a LBO announcement is made:

4. The August options would make sense here to offset any time decay against any strike premium we choose.

5. The Aug 07 25 Call Option premiums are slightly below theoretical value which gives us a nice comfort level with regards to IV and premium cost.

6. The delta for the Aug 07 25 Calls is currently at .60.

Those are some of my reasons for possibly justifying a longer term position in FDC call options. I'd would prefer a breakout above the recent consolidated range high of about 25.50 to 26 with above average volume on the stock to confirm a move higher. The problem then would be a probable increase in IV.

The risk/reward ratio would be based on an exit out of the option if the stock closes below the 22.00 level which would more than likely put premium at about $1.00-1.20 level based on current price of $2.40-2.50.

So there you have my first possible play for those of you who might like a little longer term play that includes a possible LBO factor.

I certainly welcome your feedback on this idea. Grab a "vine". I'll certainly keep all abrest of any entry points that I may plan to make on this play in future posts.

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