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One Options Strategy Looking to Make Big Profits on an Akamai Takeover

With AKAM hitting fresh six month lows, there's some whispers going around again about the potential for a takout in the name. This theory has been floating around for a few months-- AKAM has been on the list of potential M&A candidates since the beginning of the year by Goldman Sachs' Options Research team.

Who's a Good Buyer?

AKAM deals with a lot of the high-volume distribution on the internet. They're a go-to company if you've got a bunch of photos or videos to share. Last time I checked, AKAM was a supplier of bandwidth for facebook and the billions of photos shared on the site.

One name that makes sense here is AMZN. They've been developing their cloud services (EC2 and S3) for a while now and it seems as though AKAM would be a natural fit. @TechInsidr tweeted out to CNN's @LaMonicaBuzz about how that would be a great fit, and I tend to agree. There's plenty of other potential buyers out there, and the way the cloud theme has been going, I wouldn't be surprised about an acquisition over the next few months.

How to Trade it

There's plenty of ways to structure your risk, but one of my favorites in this case is to sell a strangle a few months out, and buy a call against it. Here's a potential setup:

Buy 1 Apr 38 Call @1.98 or lower

Sell -1 Jan 2012 30/45 Strangle @5.62 or higher

So what does this trade do? You're essentially taking a bullish bet that is financed with some longer term option sales, and if they are acquired before April expiration, you're going to have a significant gain on your position. Here's the risk profile:

So it's a fairly bullish bet initially, but if you let the April contracts expire you end up with a strangle sale which isn't in your best interest. So to manage this you could roll the April options out to May when time decay really starts to kick in, and adjust your strangles to account for that fact.

Of course, the super speculative play here is to just buy calls straight up. What this trade does is structure your risk in a way so the time decay hurts less bad and the volatility structure definitely helps in the event of a merger.

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/