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Computer hardware giant Hewlett Packard (HPQ) announced its intentions to buy 3Com (COMS) on Wednesday night for $2.70B or a 40%-plus premium to its closing price of $5.69. For bulls who see the merger announcement as inspiration for other future deals so that larger tech titans might enjoy a bit of organic growth, I'd like to look at one situation found recently in the pages of Barron's.

Recently, the financial weekly Barron's listed several tech companies thought to be attractive tech targets based on their businesses and valuations. In no particular order, F5 Networks (FFIV), Juniper (JNPR), 3Par (PAR), Commvault (CVLT), Citrix (CTXS), BMC (BMC), Riverbed (RVBD) and Netapp Inc (NTAP) were all considered candidates for a trip to the corporate altar. With Barron's having done the preliminary homework on the fundamental side, let's take a look at the one name currently setting up in the world according to our friend PS Elliott.

"Yummy?" From the group of eight names provided, only Citrix looks to be demonstrating strong signs of a bullish move underway and with immediate potential upside. Citrix is a small large capper at $7.0B which designs, develops and markets application software solutions. The stock is part of the NASDAQ 100.

Technically speaking and from the article, tickers FFIV, NTAP, CVLT and JNPR are all setting up as either W3 or W5 highs. RVBD and PAR are at different points within ABC waves and BMC-well, Elliott gave up on that one sometime ago due to a bad data feed. Without knowing if that's a good or bad thing, we're left with CTXS's confirmed W4 EBOT on the daily chart which signaled last Thursday with a close of $38.34.

On the weekly and shown below, we see a circled daily W4 has some pattern confirmation from a cup pattern one year in length and of late, a handle still under construction. While slightly late on the EBOT signal, bulls are just seeing a weekly confirmation for the pivot low inside candle with its highs of 39.

Figure 1: Citrix (CTXS) Weekly C&H with Daily W4

In managing potential losses using a technical basis, with recent lows of 36.75 the percentage stock risk is about 8% using both fore-mentioned patterns as our guide. Should shares do bulls the favor of climbing, Elliott expects a TAPP midpoint of $50 by mid January and an estimated range of $47.35 - $52.85 from mid December to mid February. Were that too occur, the trader would be very close to a 3-to-1 reward-to-risk situation.

Checking the options in CTXS and implieds are fairly priced. That observation is based on comparing option prices to statistical or realized volatility in shares of the underlying. Currently, the relationship largely shows values on either side of 1.00 for both short and longer-term readings. On the historical view of how premiums look, CTXS options don't typically see much lower levels with regards its implied pricing. We can see a visual of that interpretation below in Figure 2.

Figure 2: Citrix (CTXS) Historic Implied View

Checking the actual option board in CTXS, both January and March contracts look to be the best fits as it relates to the described patterns. The 40s and 45s are realistically the only gig in town without the benefit of having 2.5 point strikes. The former might be considered attractive for a bullishly-designed synthetic straddle or an outright for positioning.

The 50s, while dollar cheap are too far removed from the action to consider. While the strike does match up with the TAPP midpoint, were an actual takeover to occur, the trader holding the 50s would need a premium bid in excess of 23% in order to afford the contract any intrinsic value at all and in a situation which could find implieds rapidly crushed to boot. December is also an option, pardon the pun, but with just 38 days remaining, just narrowly making the estimated TAPP zone and a market currently overbought short-term, I'd see the right, not obligation to buy those contracts as third in show.


Chris Tyler
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
Visit Chris Tyler's Forum

The information offered here is based upon Christopher Tyler's observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.

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