To The Moon

On the same day that the Microsoft and Blizzard merger was approved by the US court, the acquisition of $Broadcom(AVGO)$ and $VMware(VMW)$ obtained approval from the European Union. When the news came out, VMW's stock price jumped more than 5% to over $156.

The certainty of Broadcom's acquisition of VMW has always been higher, because VMW's major shareholder is Dell, which has sought to sell its best asset - VMW in several times to mitigate the losses in its core business.

Furthermore, there have been management and board member adjustments at VMW since last winter, which means that although the acquisition has not been officially finalized, Broadcom's integration has already begun.

Therefore, the acquisition arbitrage of VMW is highly certain. However, it should be noted that Broadcom's acquisition price for VMW is $61 billion, while the current market value of VMW corresponds to $67.2 billion. Why is that? Does Broadcom want to increase the acquisition price?

No, in the terms of this acquisition, in addition to acquiring VMW for $61 billion in cash and stock, Broadcom also assumed a net debt of $8 billion, making the total amount $69 billion. This corresponds to a VMW stock price of around $162.5, and the current price is approximately 96% of that.

In addition, Broadcom once provided an expected completion date of July 31. Due to regulatory issues, both companies extended the transaction deadline to August 26 in May. With only one month remaining, both sides undoubtedly hope to finalize the deal as soon as possible, so increasing the price is not possible.

Looking at VMW's options chain, selling calls above $162.5 is lovely trades. VMW's options are not very active, with only monthly options available. I currently hold sell calls with exercise prices of $165 due to July and August. As seen from below, the premium for August is as high as $2.3, which is quite attractive.

As for selling puts, it is also good, but the profits are not as good as selling calls. Since the stock price is already very close to the acquisition price, puts with a low strike price have no trading volume.

If you want to sell puts, it's best to choose exercise prices below $140, because the cash acquisition value is $61 billion corresponding to a price of $142.5. VMW employees are exchanging their shares for Broadcom stock at this price, so it is a safe line. Therefore, looking at the monthly options for August, exercise prices of 130 and 135 are the best choices for selling puts.

There's another thinking. As mentioned, the transaction deadline has been extended to August 26, and both parties are accelerating to complete the deal. If everything goes smoothly, it means that options expiring in October will be accelerated to exercise in September.

Therefore, both selling puts and selling calls for October expiration are attractive. Due to the thin trading volume and large bid-ask spreads, I have sell puts with an exercise price of 135 and sell calls with an exercise price of 165, but they have not been executed yet.