Options: Playing for a Chip Merger


The chip sector is getting attention from options traders lately, according to one industry expert, and it's most likely due to consolidation speculation.

"The analog chip stocks: This is an interesting, if an arcane, sector," said Rebecca Darst of Interactive Brokers. "I know that the chip sector has gotten some attention because of Infineon's...slashing their guidance yesterday. There's also just been a lot of pessimism among investors in terms of what kind of growth this sector can hope to achieve without some sort of strategic consolidation in the sector, and what with a lot of private equity companies sitting on their hands in terms of...pursuing a lot of leveraged buyouts, that may make pricing more attractive for just this kind of strategic consolidation."

See her full interview, including comments on the straddle trade, here.

The consolidation speculation has been fed by a recent article in Barron's Magazine, she noted. That has prompted options moves in Texas Instruments , Intersil and National Semiconductor .

"The Barron's article made mention of the fact that there's something like 150 public companies in the analog chip space in the market right now. You would ask yourself, 'can the market support this many companies, and what about the likes of Texas Instruments, which has done extensive share buybacks in recent months, and that hasn't really done a great deal for its share price, so it may have to look elsewhere, what with private equity firms not out-driving the price of would-be acquirees much higher, it could make it more attractive for Texas Instruments to make a move in this environment. However, we should mention that the CEO of the company mentioned at their analyst meeting earlier this month that they were keen to achieve this level of growth in the analog space without making acquisitions, but that may not be possible, and placing these sorts of volatility bets in the July contract does give some time for developments in the sector to sort of play out."

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