Hewlett-Packard Company and Dell Inc. Continue Bidding War for 3PAR Inc.


The ATP tournaments just wrapped up here in Cincinnati, and my mind's still on the tennis courts. As such, the back-and-forth bidding war between Hewlett-Packard Company ( HPQ ) and Dell Inc. ( DELL ) over 3PAR Inc. ( PAR ) seems reminiscent of the Isner/Mahut Wimbledon match in June -- you know, the match that lasted over 10 hours. Isner eventually emerged victorious, but what about HPQ and DELL?

The two companies have been duking it out for weeks. It all started when HPQ made an unsolicited $24-per-share bid that trumped DELL's initial $18-per-share bid. The stakes have since been raised -- multiple times -- and now HPQ has the upper hand with its current bid of $30 per share. Let's take a quick look at these two opponents, shall we?

Hewlett-Packard Company ( HPQ )

HPQ has been struggling lately, but the stock's technical troubles were exacerbated when its former CEO Mark Hurd abruptly resigned at the beginning of August. Since then, HPQ has shed roughly 17% of its value, with its 10-day and 20-day moving averages pressuring the shares steadily lower throughout this time. In fact, HPQ hit a new 52-week low on Friday.

Daily Chart of HPQ Since August 2010 With 10-Day and 20-Day Moving Averages

However, HPQ has rebounded from Friday's low, shooting ahead roughly 2.9% so far today. The stock is now challenging its 10-day moving average, which has not been surmounted since Aug. 4.

In fact, it seems that option players were counting on HPQ to rebound off Friday's lows, as evidenced by Friday's activity at the September 40 call. Roughly 5,300 contracts changed hands on this front-month call -- 71% at the ask price, indicating they were likely purchased. Open interest jumped by nearly 2,900 contracts over the weekend, confirming that fresh bullish positions were added here. With HPQ trading around $39.06, these 40-strike calls are out of the money by less than one point.

For the September series, peak call open interest of 21,993 contracts can be found at the 42 strike. With another 21,531 contracts now open at the 40 strike, the heavy accumulations of call open interest directly overhead could stall the stock's progress going forward.

Friday's bullish activity is nothing out of the ordinary for HPQ. The tech stock's Schaeffer's put/call open interest ratio (SOIR) is currently docked at 0.66, in the bullishly biased 18th annual percentile.

Meanwhile, in the past two weeks, traders on the International Securities Exchange (ISE) and Chicago Board Options Exchange ( CBOE ) have bought to open 3.3 calls for every put purchased, a ratio which ranks above 81% of all other readings taken during the last year. In other words, speculators on the ISE and CBOE have seldom initiated bullish bets on HPQ at a faster clip.

While HPQ has indeed bounced from its Friday nadir, the tech stock is by no means in the clear. With several layers of trendline resistance -- as well as potential options-related resistance -- looming overhead, HPQ has its work cut out for it. Should the shares be rejected at any of several resistance levels, a capitulation by the bulls could pressure the shares to new lows.

Dell Inc. ( DELL )

Sector peer DELL hasn't been doing so hot lately, either, with the tech stock down 18% year-to-date. Since the beginning of August, DELL has been range-bound in the $11.50 to $12.50 neighborhood, with the upper rail of this range reinforced by its descending 10-week moving average, now docked just above $12.50. This moving average has served as both support and resistance to DELL in the past, with the latter currently the case.

Weekly Chart of DELL Since April 2010 With 10-Week Moving Average

Understandably, option players have adopted a bearish attitude toward DELL recently, with the ISE reporting that 1.13 puts have been bought to open for every call purchased during the past few weeks. This ratio ranks in the 85th percentile of its annual range, suggesting that traders on the ISE have scooped up puts on DELL at a faster clip just 15% of the time during the past year.

Meanwhile, DELL sports a call-heavy SOIR of 0.57, which ranks just eight percentage points away from an annual bullish peak. The September 13 call is the most popular contract in the front-month series, with a respectable 20,130 contracts in open interest. Meanwhile, just 6,846 contracts can be found at the September 12 strike, which is site of peak put open interest.

Upon closer inspection, DELL's call-heavy SOIR may have been influenced by the shorts. Despite a 10% drop in short interest during the past two weeks, short interest still accounts for 3% of the stock's available float. As such, a portion of these out-of-the-money calls may have simply been purchased as hedges by the shorts.

For the record, the 10% drop in short interest did little -- if anything -- to help bolster the shares. With pessimism on the rise, and technical and options-related resistance looming overhead, DELL may continue to find itself range-bound, at least in the short term.

In conclusion , as long as the bidding war drags on, both HPQ and DELL will likely continue to struggle.

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This article appears in: Investing , Options

Referenced Stocks: CBOE , DELL , HPQ , PAR

Schaeffer's Investment Research

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