Options: Varian Calls Active on Buyout Talk

By Jud Pyle, CFA, chief investment strategist for the Options News Network

Varian Medical Systems(VAR Quote) has rallied more than 5% today as the rumor mills churn about a possible buyout. Siemens(SI Quote), a German technology firm, is speculated to be the potential suitor. Soleil Securities initiated coverage on the stock today, giving VAR a buy rating and a 12-month price target of $38.

Call buyers have swooped in as a likely result of this speculation. The April 35 call has seen more than 5,000 contracts trade on paltry open interest of fewer than 600 contracts. Even with today's gain in the stock, this call is still out of the money, with about one week until expiration.

Takeover chatter has been a trend of late -- RedHat(RHT Quote), MEMC Electronic Materials (WFR Quote) and now Varian.

When the economy is in a funk, mergers and acquisitions tend to dry up. Renewed takeover talk could mean a more bullish point of view overall, at least as far as corporate America is concerned.

As for today's call buyers, many of the contracts, which changed hands in a series of small blocks today, went off at a volume-weighted average price of 48 cents per contract. For the option to be in the money at expiration on April 17, the stock will need to rally 6.9% to $35.48 (on average). While a 7% gain in one week may seem ambitious, the shares have already gained 22% off their 52-week low, hit about one month ago.

Jud Pyle is the chief investment strategist for Options News Network (www.ONN.tv) and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.