Market Perspective

Neutral on near term market direction. Slightly positive on year out.

Therefore, sell balanced combination of calls and puts in portfolio.

Stock and Option Analysis TTWO Take-Two Software

Priced within 20% of my target, possible call sale.

Risk is from predominately on the upside, there are two main possible scenarios for that to occur:

1. Higher offer from ERTS or another company at closer to my fair value of $32. ERTS has for the third time extended their offer deadline to June 16, but did not raise the offer of $25.74. A mere 8% of TTWO shares have been tendered.
2. Earnings were announced last year on 11 June 2007. If earnings are announced at a similar time, then will be out prior to expiration. Current consensus is $1.12, with a range of $1.02 - 1.30. By all reports sales of GTA4 have been sensational, so upside surprise is possible. Combined with the recent announcement of the BioShock movie confirming speculation that began in 2007 highlights the value in TTWO intellectual property.

TTWO have evolved beyond a one trick GTA pony. They now have an good range of titles across multiple platforms.

Downside risk is limited due to ERTS offer and strength of GTA4 sales.

Upside risk from total sale price of $28.25 (27.5+.75) to my target of $32 is 13%. Is a bird in the hand worth two in the bush?

Consider another option

Longer dated. The idea behind this is to sell a higher strike and still collect close to the same premium, i.e. sell more time for more capital upside. If a takeover is announced or if current earnings are excellent then get to participate in the upside. The downside is TTWO’s normal attire is volatility and selling more time means owning any potential pitfalls between now and expiration.

This strategy is especially appealing when the longer dated options would result in a holder period for the underlying of over a year and thus provide a capital gains tax benefit. In this case I bought TTWO earlier this year and have no interest in selling 2009 options on TTWO.

The Sept 30 Calls last sold for .40 down .20. Those kind of prices would result in around a 40% annualised return. As that is a third less than the June Call I am not interested.

Conclusion

All considered I believe TTWO is worth more than the current $27; however, I do want to free up cash for other opportunities and so will place a limit order for June $27.50 calls above the last price of $0.75. The option price is considerably higher than the theoretical price of 0.2622, thus negating the seemingly low IV.

As always when I sell calls I am happy to hold TTWO. If I wanted to sell the underlying then I would sell.

I would not recommend TTWO as a new covered call position.