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Strategy looks for Dynegy to move

By: optionMONSTER
Posted: 2/16/2011 11:56:00 AM
Referenced Stocks: DYN

Dynegy faces a takeover drama, and one investor is looking for volatility to increase.

optionMONSTER's tracking systems detected the purchase of 2,475 March 6 calls for $0.20 and 2,475 March 5.50 puts for $0.05. Volume was above open interest in both strikes.

DYN The trade, known as a strangle, will make money from the power-generation stock rising or falling sharply. If it remains little-changed and closes between $5.50 and $6 on expiration, the investor will lose the $0.25 premium they paid. (See our Education section)

LBO veteran Carl Icahn is trying to take the company private for $5.50 a share. Hedge fund Seneca, which owns more than 9 percent of company, has resisted the offer as too low. Now Icahn is saying he'll walk away unless 35 percent of shareholders accept his price by Friday.

DYN is up 2.4 percent to $5.98 in late morning trading and has risen 20 percent in the last three months. Icahn's lack of success may suggest that most investors believe the stock is undervalued at these levels and expect higher prices. Short interest also represented about 10 percent of the float on Jan. 14, which could potentially draw buyers.

Another consideration could be the improving economy, which has the potential to increase demand for the company's electricity. DYN has failed to participate in the stock market's rally over the last two years and is still trading at about the same prices as it did in March 2009.

Overall option volume in DYN is 9 times greater than average so far today.

(Chart courtesy of tradeMONSTER)