Call Options Or Put Options On AOL (AOL)?
AOL (AOL) just sold 800 of their patents to Microsoft (MSFT) for more than $1 billion.
That’s an eye-popping infusion of cash for a company with a $2 billion market cap before the deal was announced.
Nobody viewed AOL’s patent portfolio as that valuable. As a result, the deal sent AOL’s stock soaring from around $18.40 to more than $24.50 overnight.
As you can see on the chart below, AOL is now at a 52-week high. In fact, AOL is near its all-time high since it was spun off from Time Warner Cable (TWC) in 2009.
Is now the time to buy call options on AOL as it soars to new heights? Or should you buy puts on AOL as it comes back to earth?
The bulls make a convincing argument…
A massive $1 billion infusion of cash gives the company plenty of ammunition to create shareholder value.
And management has even commented that they plan to return a “significant portion of the sale proceeds to shareholders”. That means they’ll likely be buying back shares or issuing a special one-time dividend in the near future.
What’s more, AOL still has a treasure chest of patents it still owns. So they might not be done selling off patents to generate even more cash down the road. And that would fuel another surge higher.
But the bears have a compelling case as well…
The bears are quick to point out the overnight surge in AOL’s share price is a one-time event. And another deal like the one with MSFT is unlikely to happen again.
More importantly, the deal is already fully accounted for in the stock’s price. So there’s no reason to buy on this old news.
According to bears, a more likely scenario is where AOL squanders there treasure trove of cash.
Remember, management said they’ll return a “significant portion” of it to shareholders. That’s an overly general statement. It can be twisted to mean whatever management wants it to.
And AOL has a long history of wasting money on over-priced acquisitions like Netscape and Huffington Post.
Simply put, AOL could decide to return 10% (still a “significant” $100 million) and blow the rest on stuff that doesn’t add shareholder value. And that could send the stock plummeting.
If you think AOL will generate shareholder value with their $1 billion payday, take a look at buying the AOL July 2012 $29 Calls for around $0.40.
If you think AOL will squander their cash, take a look at buying the AOL July 2012 $19 Puts for around $0.50.
Good Investing,
Corey Williams
Category: Call Or Put Options?
