Lehman Up on Buyout Rumor

Lehman Brothers (LEH, $15.82, up $2.10) is trading higher this morning on news that the Korea Development Bank was considering a bid for the company although nothing is official. According to the story, the Korean bank didn’t reach an agreement with Lehman because it is still worried about the company’s debt. Lehman’s stock has been punished as it struggles to raise capital due to the subprime exposure mess on its books.

There’s also chatter that Lehman discussed the sale of a 50% stake with KDB or China’s CITIC Securities on Thursday, but those talks are said to have failed because both companies felt the asking price was too high. Wall Street is also saying that Lehman’s is trying to find a buyer for some of the bank’s business and was looking for a $20 per share acquisition price.

I don’t know if that’s going to happen but the pressure cooker is on. Either way, we have already been rewarded with one of our call option plays. Lehman opened up this morning at $15.80 and I’m not sure if we will go much higher than that today. Usually these types of events give a stock a big pop in the morning and it slowly drifts lower the remainder of the day.

The January 20 calls (LYHAD, $2.40, up $0.40) opened this morning at $2.40 which is well over our exit target of $2.00. The calls were profiled at $1.40 and a $2.00 stop would have given us a 40% profit. We are now looking at a 70% profit and it would be wise to close the position or at least half of it. I’ll provide an update later in the day on our other positions.

Rick Rouse
Rick@OptionsMentoring.com

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