Options Action

Takeout In The Palm Of Our Hands?

After squeezing the shorts and defying gravity, Palm finally came back to Earth with a major thud today. And while the fall was painful for equity investors, do options traders sense a takeout on the horizon?

"This morning’s news on PALM only reinforces my thoughts about the company’s only real chance for long term survival is to be taken out by a larger player," said Dan Nathan, Chief Options Strategist at Phoenix Partners Group.

The stock had been surging on hopes its Pre would pose a viable competitor to Apple's iPhone , but it's turned out not to be the killer management and its private equity partners had hoped for.

The company's stock is trading at 52-week lows, and is off some 50% in the last five weeks, which, according to Nathan, could make it an attractive takeout for a company looking to beef up its smart phone business.

"Hewlett and Dell will always be mentioned as they have both stated their intentions of entering the smart phone arena, and why build when you can buy?" Nathan asked.

The trade structure we recommended on the show? Sell a downside put and buy an out-of-the-money call spread. Dan's new trade? Buying the Jan '11, 7.5/12.5-strike call spread for $1.10 and financing that purchase by selling the Jan '11 5-strike put for $1.10, net-net, spending next to nothing for a trade that is no riskier than buying Palm stock for five bucks, or 25% lower than current prices. 

Questions, comments send them to us at: optionsaction@cnbc.com