Bloomberg News

HP Bulls Bet Strategy Shift Will Spur 53% Stock Rebound: Options

September 15, 2011

Sept. 15 (Bloomberg) -- Hewlett-Packard Co. options traders are the most bullish in two years amid optimism the company’s shift away from personal computers will prove successful, even after disappointing earnings erased $20 billion from the stock.

The ratio of calls to buy shares versus puts to sell has climbed 7.3 percent in the past month to 1.6, the highest level since August 2009, according to data compiled by Bloomberg. January $35 calls, priced 53 percent above the shares, have the largest open interest among Hewlett-Packard options, accounting for 6.5 percent of 1.28 million outstanding contracts. The stock plunged 27 percent since Aug. 17 to $22.93 yesterday.

Options traders are speculating the 72-year-old company in Palo Alto, California, is undervalued after falling to a record low 5.04 times profit. They’re betting Chief Executive Officer Leo Apotheker, 57, will succeed with his expansion in software and other products that help clients build data centers.

“The options market may be showing more of a true representation of what people think of the valuation,” Pat Becker Jr., who oversees $2.2 billion including 1.5 million Hewlett-Packard shares at Becker Capital Management Inc. in Portland, Oregon, said in a telephone interview yesterday. “Part of the share price decline here is anger with the management, and that will dissipate over time.”

Technology Options

The Chicago Board Options Exchange Volatility Index, the benchmark gauge of U.S. equity derivatives prices, fell 7.6 percent to 31.97 as of 4:15 p.m. in New York. The gauge known as the VIX, which tracks Standard & Poor’s 500 Index options prices, has averaged 21.27 this year and has fallen 33 percent from a two-year high on Aug. 8. Implied volatility for the Technology Select Sector SPDR Fund’s 30-day contracts was down 24 percent to 28.52 yesterday since Hewlett-Packard’s plunge drove it to a 15-month high on Aug. 19.

The VStoxx Index, which measures the cost of options protecting against losses on the Euro Stoxx 50 Index, declined 9.5 percent to 42.29 today. The volatility gauge has fallen 21 percent since it reached an almost 32-month high on Sept. 12.

Hewlett-Packard shares added 1.5 percent to $23.27 today, giving them a three-day gain of 3.1 percent.

Apotheker announced a corporate overhaul on Aug. 18, saying he will spin off the PC unit nine years after Hewlett-Packard paid $17.6 billion for Compaq Computer Corp. The former CEO of SAP AG agreed to purchase Cambridge, England-based Autonomy for $10.3 billion, shifting the company’s focus to developing software for businesses. SAP, based in Walldorf, Germany, is the world’s largest maker of business software.

1987 Crash

The CEO reduced the company’s sales forecast on Aug. 18 for the third time since he joined Hewlett-Packard in November. The stock plunged 20 percent the next day, the most since the October 1987 market crash, to $23.60.

“The overwhelming majority of large HP shareholders remain opposed to the HP/Autonomy deal,” Toni Sacconaghi, a New York- based analyst at Sanford C. Bernstein & Co. who has an “outperform” rating on the stock, said in the report Sept. 13. “Investor exasperation with the company is the highest we have seen in 13 years following the sector.”

Calls had eight of the 10 largest increases in open interest, or the number of existing contracts, among all Hewlett-Packard options in the past week, Bloomberg data show. January $24 calls had the biggest gain, jumping to 12,155 contracts from 948 contracts.

Fewer puts in relation to calls “probably means that at least a substantial portion of the people out there trading options are feeling like this might be getting close to a bottom, and there’s not a lot of additional downside,” Randy Frederick, the Austin, Texas-based director of trading and derivatives for Charles Schwab Corp., which has 8 million brokerage accounts, said in a phone interview yesterday.

Cheapest Valuation

Hewlett-Packard, which has a market capitalization of $45.6 billion, has the lowest price-earnings ratio among the 75 technology companies in the S&P 500, according to data compiled by Bloomberg. Its valuation of 5.12 times reported income is 61 percent less than the multiple for the index.

“Despite the weak earnings figures, we see value in it,” Eric Teal, chief investment officer at First Citizens Bancshares Inc., which manages $4 billion in Raleigh, North Carolina, said in a telephone interview yesterday. “By most traditional valuation measures, it scores as attractive to us.”

Hewlett-Packard shares have lost 46 percent this year through yesterday, more than 489 companies in the S&P 500. They closed at $22.58 on Sept. 12, the lowest price since June 2005. Today, they jumped 1 percent to $23.15.

Lower Prices

Prices for bearish Hewlett-Packard bets are dropping relative to bullish contracts. Three-month options that pay if the shares fall 10 percent cost 1.15 times more than calls priced 10 percent above the current stock price, down from 1.18 before Apotheker’s strategy shift, according to data compiled by Bloomberg. The price relationship known as skew was the lowest since January 2009 on Sept. 8, falling to 1.12.

“Because the stock is down so much, the options market reflects the possibility of a relatively abrupt recovery,” Ophir Gottlieb, managing director of client services at Livevol Inc., a San Francisco-based provider of options market analytics, said in a Sept. 9 interview. “The next news that moves the market -- if it moves the company -- very well may be good news, since the bad news is already out.”

--With assistance from Aaron Ricadela in San Francisco. Editors: Joanna Ossinger, Nick Baker

To contact the reporters on this story: Cecile Vannucci in Amsterdam at; Jeff Kearns in New York at

To contact the editors responsible for this story: Nick Baker at; Andrew Rummer at

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