[Options] Sell VMW‘s Puts as the Broadcom-VMware deal concern

$威睿(VMW)$ stock price plunged during last two days, and It fell another 7% in the pre-market trading.

As concerns over the last leg of the Broadcom-VMware deal intensified over a snag in China. Broadcom and VMware set Oct. 23 as the deadline for VMware holders to elect the form of merger consideration they will take.

The companies reiterated that they expect to close the transaction by Oct. 30, subject to the receipt of regulatory approvals and other customary closing conditions, according to a statement on Wednesday.

However, the stock price is honest. Traders have some concern despite sources saying the deal should close without major issue.

Traders are focused on China amid a report that China's antitrust approval for the megadeal may be delayed.

The concern also came amid a report that the U.S. brought in new updates that would curb the sale of chips that Nvidia (NVDA) made for the Chinese market.

Let's review the transaction, it is cash + share conversion. The shareholders of VMW can choose to convert 50% of their positions at 1: 0.252 of AVGO, Another 50% of the position was privatized at a price of $142.5 per share.

VMW has 428 million shares, 50% is 214 million shares, and the market price of 2.14*0.252*AVGO (if calculated according to today's $890) = 48 billion

The other 50%, 2.14*142.5 = 30.5 billion

Then the market value of VMW calculated according to the current floating price of AVGO should be 480 +305 = 78.5 billion, corresponding to the stock price of $183. The pre-market stock price is $154, which is about 84% of the theoretical price.

I think the deal will finally succeed, but it may take longer.

If SAMR doesn't approve the deal, Broadcom will close down the whole business of VMW in China, which will affect the acquisition schedule , but not the result.

There have been many news and an internal letter to that VMW has made a layoff plan in China.

That is my think, which is not necessarily correct.

I will sell puts at strike price of $135, mainly considering that the cash equivalent of $142.5. If some restrictions and bans on AVGO may cause AVGO's share price to fall, then the floating pricing part will fall, but the shareholder pricing 142.5 will not change.

In pre-market trading, options are not available. According to last night's option chain, put premium with strike price of $135 due in November is $3.2. Due to the stock price plunges 7% in pre-market trading, the puts premium can be expected to soar tonight, and option IV may reach 100%. The risk-return ratio is relatively high and effective for sell puts.