We’ve been discussing Hewlett-Packard around the shop and the consensus seems to be that the stock is cheap, but for apparently pretty good reasons. Opinion is split on whether the restructuring of their existing businesses and purchase of Autonomy will ultimately succeed. Coincidentally, I ran across this article tonight at Bloomberg about the options market activity in HPQ:

Hewlett-Packard Co. (HPQ) options traders are the most bullish in two years amid optimism the company’s shift away from personal computers will prove successful, even after disappointing earnings erased $20 billion from the stock.

The ratio of calls to buy shares versus puts to sell has climbed 7.3 percent in the past month to 1.6, the highest level since August 2009, according to data compiled by Bloomberg. January $35 calls, priced 53 percent above the shares, have the largest open interest among Hewlett-Packard options, accounting for 6.5 percent of 1.28 million outstanding contracts. The stock has plunged 27 percent since Aug. 17 to $22.93.

As you might expect, the demand for calls has pushed up the price relative to puts:

Prices for bearish Hewlett-Packard bets are dropping relative to bullish contracts. Three-month options that pay if the shares fall 10 percent cost 1.15 times more than calls priced 10 percent above the current stock price, down from 1.18 before Apotheker’s strategy shift, according to data compiled by Bloomberg. The price relationship known as skew was the lowest since January 2009 on Sept. 8, falling to 1.12.

Now there are two ways to interpret this information, bullish and bearish. Bulls – as most of those quoted in the article seem to be – take it as confirmation of their analysis. Maybe they believe the restructuring will work. Maybe they think the company will be taken over. These call buyers not only believe these things, they believe they will happen before the third Friday in January. The strike with the most open interest is 53% above the current price. These are some confident people.

The bearish – contrarian – case is pretty simple. The speculative crowd is obviously overly exuberant, paying high prices for, essentially, lottery tickets. That sounds more like hope than a strategy.

Now, I have no idea who is buying all the calls on HPQ. Maybe they do know something we don’t. Maybe a takeover offer is already in the works. Anything is possible. Short of that, does anyone believe the prospects for HPQ will really improve so dramatically over the next 4 months that the stock will rise more than 50%?

Our research on HPQ so far is just cursory but on the surface it looks cheap. And getting rid of a low margin PC business for a higher margin software/services business would seem to be a logical choice. But is Autonomy the right company? I don’t know enough to say but HPQ does seem to be paying a pretty premium for the company. How much will they get for the PC business? Does anyone want it? I have no idea but this isn’t exactly an industry that lacks capacity. What about the printer business? Will it continue to throw off cash flow as it has in the past? How often do you use your printer on an average day? It seems to me that there are a lot of questions with no answers. Either the call buyers really do know something or they are about to learn how unforgiving the option market can be. I’ve been around long enough and traded enough options to know which is more likely.

For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Joe Calhoun can be reached at jyc3@alhambrapartners.com