I think we all know the market is a bit uncertain now, and is very volatile. The market just today swung well over 175 Dow Jones points. This has many of todays investors buying protection and the VIX is around 30 means that option premiums are fairly rich. DELL has options and in fact they even have LEAP options. The DELL 2012 January $12.50 Put Options unlike the underlying stock just hit a 52-week high at $2.87. Wow.
Since the underlying stock is beneath the option strike price, the holder of the option can put it to the seller of the option at anytime prior to the options January 2012 expiration date. So if an investor sold a put and say collected $2.75 in premium, they would have a break even on the stock of around $9.75. Thus, if the investor had DELL put to them today ($11.90) and turned around and sold it immediately the investor would make a profit of around $2.15 ($11.90 - $9.75 = $2.15) or they could keep it. Why keep it?
Well, DELL according to CNBC is exp-ected to earn around $1.27 going forward the next four quarters. That would give the $9.75 put entry point at a forward P/E multiple of around 7.67. Now, 7.67 seems pretty low. Why so low? Well, if we look at the balance sheet of DELL we see it has about $10.5 billion in cash and around $3.5 to $4 billion in debt, which means at the end of the day the company's huge cash hoard leaves it with about $3.44 of cash per share. If we subtract the cash from our put entry point of $9.75, the amount paid for the business is around $6.31. Thus, a net enterprise value of around $6.31 per share for an estimated $1.27 of earnings over the next four quarters puts the forward P/E on the business at around 4.96 or around 20.12% from an earnings yield stand point after tax (DELL's estimated tax rate is around 27% according to Valueline and thus its pre-tax forward earnings yield would be around 25.55%).
In a 2.96% 10-Year Treasury Bond Yield, those earnings yield seem like they could be pretty enticing. Of course that all only comes about if they put the stock to the investor, otherwise the investor just keeps the premium from the put sold or if DELL stock rises from here they might have an opportunity to buy the put back at a lower premium and make the difference.
Just thinking and want your thoughts. What do you think?
Happy investing to all.