In regards to my previous post about an option opportunity with 99% winning rate with $VMware(VMW)$ , it was totally wrong. The VMW stock price has already surpassed the total $69 billion acquisition price.
The reason for this mistake is that I didn't carefully read the transaction details. It's a meaningful lesson. Let me explain how to calculate the price and how I plan to remedy my wrong.
Reviewing the announcement, the most crucial part is not the first paragraph on the first page but rather the transaction details on the second page.
Highlight of VMware shareholders will elect to receive either $142.50 in cash or 0.2520 shares of Broadcom common stock for each VMware share.
This deal is a cash-and-stock transaction. Shareholders can convert 50% of their positions in $Broadcom(AVGO)$ stocks at a ratio of 1:0.252. The cash price of $142.5 is fixed, but 0.252 shares of Broadcom stock have increased by 50% since last year.
Naturally, choosing a stock convert is more advantageous, especially if you believes in AVGO's long-term prospects andplans to hold it. If all shareholders opt for a 50% stock convert, the combined value of 50% of cash and 50% of stock should be approximately $79 billion, corresponding to around $185 per share. However, the 50% value will based on AVGO's stock price movement.
Therefore, this is not a $61 billion or $69 billion acquisition; it is nearly an $80 billion semiconductor acquisition at the current price. However, this value is fluctuating and subject to change every trading day.
The calculation is based on VMW's 428 million shares, with 50% being 214 million shares. And 214 million * 0.252 * AVGO's market price (assuming $900) = $48.5 billion + $30.5 billion (fixed 50%) = $79 billion.
The biggest uncertainty in this case comes from half of the value being subject to market movements. Therefore, the most reasonable approach would be to Sell Puts, not Sell Calls. Selling Calls would be equivalent to a bearish view of AVGO, which is not arbitrage.
Now, let me share my current holdings. I currently have some Sell Calls due in August with a strike price of $165, costing$3. When the stock price surged last night, I faced a big loss. Now, I plan to close sell call positions during this tech stockpullback while minimizing my losses.
I also have Sell Puts with a strike price of $135, which I believe should be fine since the $142.5 price is fixed. Depending on the situation, I may consider adding Sell Put options with strike prices of $140 and $135. I still have high confidence in this side of the trade.
Comments
if you currently own 100 shares of VMW and at time of aquisition Broadcom's share are at $900, you would get the following. $142.5 x 50 (half your shares in VMW at buyout offer price) = $7125.
Based on the AVGO price of 890 dollars today one share of Vm software stock is worth 0.5 shares of AVGO worth 112 dollars plus 0.5 shares in cash at 71 dollars resulting in the present value of 1 share of vm software stock of $183
This is calculated as follows a half share ie 50% of vm stock is worth 71 dollars the other 50% is worth 0.252 times 890 times 0.5 which is 112.Hence the total is 183 dollars
AVGO could drop significantly between now and the deal close 2) The deal could be rejected by regulators and never close. Both of these could have a big effect on the value of VMW shares.
perhaps, a product like a cloud network of integrated clouds with api /plugins? consider, chat app connectors allowing integration like never before would be great?
If AVGO acquired an AI startup who can rival these different AI chatbots that would be pretty interesting to see. They already own and design the silicon that powers the infrastructure. And they have VMWare to provide the cloud platform and run the software 🤷🏾♂️. They can use the custom TPU chips they design for Meta and Googl and power their own AI lol