Following last Friday's mostly mixed-to-disappointing earnings results and equally unimpressive pin action in shares, "second chance" smart phone manufacturer Palm (PALM) has been the talk of the town for many bulls. Seemingly out of left field but aided by heavy short interest of 30%, shares of PALM have surged nearly 22% in Monday's and Tuesday's session.
Monday's impressive jump of 13.85% was apparently sparked by unconfirmed buzz of a secondary offering. While seemingly counter-intuitive, additional dilution when executed properly, can find traders biding shares above what they expect will be the determined price. The consensus view is the smart institutional money will support shares if they're obviously interested enough to buy fresh stakes in a company, such as Palm.
Tuesday's stock action saw solid follow-through of 7.02% on further anticipation of the still undisclosed terms of the secondary and trader talk of Nokia (NOK) rumored to be interested in acquiring the company. "Take-over chowder" has of course been popular of late with names such as Potash (POT), discussed last week in this column and Energy Conversion (ENER) enjoying some play as a few actual deals have, at the same time, been agreed upon.
Technically speaking, with Tuesday's price extension shares of Palm are attempting a breakout of a near three-month long base of about 25% depth. The jump of the past two sessions looks to have occurred from a "low" two week handle from a somewhat lopsided "W" or high double bottom. Bulls might also see a bit of an inverse Head & Shoulders shape over the same period, both of which are annotated below-and a picture which bears may call "Bull!" at the very same time.
Figure 1: Palm ( PALM) Daily Annotated "Bull"
Longer-minded bulls may also expand their horizons by zooming out to a weekly chart. Going back two years and the current daily chart breakout looks to be a well-shaped handle that's part of a large but deep cup base dating back to late October 2007. Of course, that may also be called "Bull!" by the bears and existing large short interest, whom might be more focused on the less optimistic Elliott W5 completing sometime soon.
On the option front, Tuesday's action was abnormally heavy in registering volume of 150,000 versus a daily average of 25,000. Investors emphasized the calls, but not by nearly as wide of a margin as one might blindly guess. In fact, the "restraint" style put / call reading of 0.79 which shows 1.21 calls for every put trading on the session, is likely tied back to Palm's heavy short interest.
The "restraint" has led to a bit of skew in the calls relative to the puts, wherein calls trade at a discount to the puts. At times the difference in prices can be steep. As of last night and following some intraday spiking, levels are mostly subdued.
Nonetheless as to where the differential between calls and puts are at the moment, the mechanics behind the pricing inefficiency boil down the potential inability to effectively hold short stock in inventory and the pricing of non-directional conversion. Due to this, the puts will quite often trade on par with the calls as traders under-the-surface are, through their collective efforts, establishing and emphasizing the conversion or the more bullish two-thirds of that formula known as the synthetic long call.
I strongly suggest readers wanting a bit more information on this type subject matter go to Investors.com. Last night I discussed the subject and weighed in the merits of a bull vertical versus a call calendar on stocks facing hard-to-borrow issues.
Checking the board and honing in on the sometimes accurate heat-seeking action, the slightly out-of-money October 18 call was the most active by a fairly wide margin. Nearly 14,000 contracts traded versus open interest of about 10,000. Priced at $0.85 per contract, "the skew" is pretty much absent and pricing in general looks mostly fair with regards to the statistical movements of PALM with implieds near 70%.
Early Wednesday and in the premarket it was finally announced Palm will offer 20.0M additional shares at $16.25, representing a discount slightly less than 5% below Tuesday's close of 17.07. Traders have bid shares slightly higher on confirmation that other muscular bulls are interested in supporting shares.
Where will shares go from here? How far could the breakout be good for? Could the pattern turn into a false breakout? Those are all good questions, however for call buyers they may also be secondary to knowing what type of adjustments or exit strategies are best suited for Palm, should shorting stock become problematic.
Chris Tyler
Senior Staff Writer & Options Strategist
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The information offered here is based upon Christopher Tyler's observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.
