Palm Beached

• Posted by Adam Warner
• on December 18th, 2009

PALM didn’t get the smartphone memo today. Either that, or no one likes their product. What do I know though.

MKM Partners  recommends the name into weakness, and has this options idea.

Six‐month at‐the‐money implied volatility in PALM is 75%, down sharply from the 157% peak in late 2008, but still higher  than  levels  that  prevailed  prior  to  that  spike.  Meanwhile,  90%/110%  relative  skew  is somewhat  elevated in the 56th percentile relative to the past two years. Given our view that PALM has a solid downside floor and a numberof catalysts that could drive shares sharply higher towards our $20 target price, we highlight May 2010 risk reversals 
that  entail  selling  10  strike  puts  at  $1.70  to  buy  12  strike  calls  for  $1.55  and  net  $0.15  credit.  Note  that  these  prices  are  estimated,  based  on  the  pre‐market  trading  in  PALM  at  $10.80.  This  position  commits  to  getting  long  stock  at  the  equivalent  of  $9.85,  a  level  that  we  consider  to  be  compelling  value,  and  provides  levered  participation  to  the  upside through the upcoming catalysts that we anticipate.

Important to note this was written with PALM at $10.80, but it opened around $10.20, so the prices are actually better.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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