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The rumor mill was churning once again on Monday. The action followed news early in the day that Cerberus Capital Management agreed to buy an 80% stake in DaimlerChrysler’s (DCX) Chrysler Group for $7.4 billion. The deal is the latest in a recent wave of corporate buyouts and mergers. Furthermore, the action has some market players sifting through stock screens in search of the next potential takeover target. It can also lead to a flurry of options activity in some of those companies that get caught up in the rumor mill. Here is a roundup of some of Monday’s action.   

Two chemical companies were active on takeover talk. Lyondell Chemical (LYO) call options saw heavy trading on speculation the company might be acquired. Shares hit a high of $38.22 as the rumor made the rounds midday Monday, but then settled up 47 cents to $37.22. Options traders reacted with aggressive trading in the May, June, and September 40 calls. The May 40s were the most actives, more than 9,400 contracts traded on the day, compared to open interest of 4,876.

Mosaic (MOS), another specialty chemical company, saw action on rumors Potash (POT) might be eying the company. MOS traded up 64 cents to $30.11 and players looking for short-term profits snapped up the May 30 calls. More than 4,500 contracts traded on the day, compared to open interest of 2,513. The June 35 calls also saw a noticeable uptick in volume.

A Diamond Offshore (DO)-for-Rowan (RDC) rumor infected trading. Like DO, Rowan is a Houston, Texas-based oil driller. So, the rumor might make some sense. Some players in the options market seemed to think so. RDC rose 17 cents to $37.44 and the modest gain was met with a flurry of options activity. The June 40s were the most actives. More than 6,100 contracts traded on the day, compared to open interest of 1,834.

Cleveland Cliffs (CLF) was active. According to Reuters (Buyout Talk Spurs Call Activity in Cleveland Cliffs, May 14), the rumor is that either Brazil’s BVRD or Rio Tinto might be looking to acquire the iron ore producer. CLF options volume jumped on the news. Shares rose 93 cents to $74.53 and May 75, May 80, and June 80 call options saw aggressive trading.  

Some of the retailers were mentioned as buyout or takeover plays on Monday. The recurrent Gap Stores (GPS) buyout rumor resurfaced. The stock didn’t react. GPS settled down 3 cents to $18.29 a share, but the June 20 calls saw some action. Pier 1 (PIR) rallied in afternoon trading following takeover talk (reported on Briefing.com). Shares finished the day up 20 cents to $7.73 and volume rose in the May 7.5, June 7.5, and June 10 call options.  

Quicksilver (KWK) hit a high of $42.01 in midday trading following an Encana (ECA)-for-KWK rumor. KWK shares closed the day at $41.33 and the June 45 calls were the most actives. More than 3,500 contracts traded on the day, compared to open interest of 4,399. As is often the case, players looked to the out-of-the-money call options that expire in one or two months to get big leverage in anticipation that a takeover (or mere speculation of a takeover) will lift the share price in the short-term.  

Obviously, chasing rumors in this manner is not a strategy we recommend. More often than not, rumors turn out to be bogus or false. They often seem to occur with the most frequency at important times such as the end of the calendar quarter or, in this case, options expiration week. Other times, the speculation might have some merit, but the timing of the announcement is equally difficult to predict. So, whenever a rumor surfaces, treat it with caution and keep in mind that it is more likely to be true if: 1) the story is covered by a major publication, 2) the stock is NOT approaching an important technical level and the rumor does not surface near options expiration, 3) an increase in call volume indicates that some players are actually putting money on the line, and 4) an implied volatility skew develops in the options to indicate that the market is bracing for higher levels of volatility for the stock in the short-term.  

Frederic Ruffy  
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site
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