Wednesday, October 6, 2010

Goldman Advocates Buying Nov. Puts @ $35, On New Merck -- As JNJ Arbitration Uncertainty Hedge

If the venerable Goldman Sachs trading mavens think Merck's shares reflect too much value, at $37 (given the $10 billion potential in three years' lost sales from a bad J&J arbitration outcome), who am I to disagree?

Benzinga gets credit for this fascinating tip:

. . . .Goldman, Sachs & Co. is. . . suggesting buying puts on Merck as a hedge to long shares through the company's arbitration process.

The analyst believes that the stock is already pricing in a favorable outcome for Merck, noting that options prices are at a three-year low, which makes them a good way to hedge the overdone shares.

The analyst suggested buying the November $35 put for $0.59 on new positions and rolling the previously long Oct. $36 put at this time, which was previously suggested as a long hedge. . . .

If Goldman is right, and Merck is trading assuming a positive arbitration result, what on Earth will be the damage -- if Merck doesn't prevail?

$30, or $31? 29?

I dunno. Yikes.

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