Stock Question : Buyouts?

Question

Im in a pickle here, i was looking at the stock TMY, they have bidders for a buyout, the stock trades at 2.00 and a realistic buyout is between 5-7 dollars which is a good little profit. My question is:

This company only has options til Jan 08, so with a buyout planned at $6 should i load up on the Jan 08 calls at 5.00? they are only about .10 pps , my only problem is if a deal gets done at the end of this month, how long would it take to close. and for the mere chance it got done and didnt close in time, would the options still go up?

Answer 1

Never buy options in the events of Buyout, merger or acquisition, you will not gain much from it, instead false hopes.

The question in any investment is whether you can calculate the risk. In these events there is no way to predict the risk. You might make a lot of money one time where loses more most of the time.

So My advise is Stay away from it. I have experienced it losing over 10,000 US$ in one night from buying options in these events

cheers

Answer 2

Information about a buyout is usually incorporated into the price of the target immediately. Two factors determine the jump in price. Those factors are the price that the market expects for the sale and the probability of success.

The price of TMY jumped by 24 cents when the announcement about the potential buyout was made. This means that the market either expects the deal to fall through or expects the price to be a lot lower than you do.

If the deal gets done by the end of the month and the price actually is in the $6.00 range -- then the options would increase in value immediately.

But be careful -- because the market's reaction to the news so far indicates that the market believes those options will expire worthless.