IBM (IBM, $91.95, down $0.96) traded lower today after news this morning that the company was considering buying Sun Microsystems (JAVA, $8.89, up $3.92) for $6.5 billion in cash. We all know what happens when this type of deal is announced. The company that is making the acquisition usually trades lower while the company gettting bought out trades at a premium.

I have been ultra bullish on IBM because it looks to be one of the strongest names in the Tech sector but this news was not good if you were holding call options. IBM is interested in buying Sun as a way get some hardware business back into its portfiolio and help grow its computer-server business. Give the stock credit though, IBM made it back to within a penny of yesterday’s close.

I mentioned on Monday that the IBM April 95 calls (IBMDS, $2.59, up $0.37) could have been sold at $3 and some of those profits could have been rolled over into the April 100 calls (IBMDT, $1.00 down $0.20).

I bought 10 of the April 100 call option contracts at $1.08 on Monday and sold them today for $1.00. They were actually profitable at one point but were down a lot when the opening bell rang. Once the news IBM was acquiring Sun came out, it ruined the momentum of the trade and it was time to cut my losses and move on. With commissions, I paid $1,095 and got back $985 so I lost $110 or 10%.

I was encouraged by the action in IBM in the afternoon and the stock could bounce back but if IBM has to use some of its shares to make this deal with Sun happen then it could send the stock back below $90. I didn’t want to take that chance and felt safer taking the small loss. We will continue to keep the stock on our Watch List but there are better trades out there than to worry about this one.

Rick Rouse
Rick@OptionsMentoring.com

]]>