EMC buys private software company

Posted Mar 11th 2008 3:00PM by Brent Archer
Filed under: Deals, EMC Corp (EMC), Options, Technical Analysis

EMC Corporation (NYSE: EMC) shares are rising today after the company announced yesterday evening it bought privately held software company Infra Corp. for an undisclosed amount. The company also made a $3.25 per share takeover offer for Iomega Corp. (NYSE: IOM) yesterday, but it was rejected. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on EMC.

After hitting a one-year low of $12.74 in March, the stock hit a one-year high of $25.47 in October, but has moved lower since then. EMC opened this morning at $15.00. So far today the stock has hit a low of $14.76 and a high of $15.04. As of 12:25, EMC is trading at $14.86, up $0.16 (1.0%). The chart for EMC looks neutral and steady while S&P gives EMC a very positive 5 STARS (out of 5) strong buy rating.

For a bullish hedged play on this stock, I would consider an April bull-put credit spread below the $14 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.1% return in just one and a half months as long as EMC is above $14 at April expiration. EMC would have to fall by more than 5% before we would start to lose money.

EMC hasn't been below $14 since last March but has been slipping steadily recently. This trade could be risky if the economy continues to slow, but EMC's acquisition frenzy indicates that the company thinks it is still on solid footing.

Brent Archer is an options analyst and writer at Investors Observer.

DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in EMC.

Tags: EMC, Infra, inthenews, Investors Observer, InvestorsObserver, IOM, Iomega, options