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Of more immediate concern is that once a merger or buyout is announced, the implied volatility of the options declines dramatically, as a large price-move above or below the purchase is unlikely. That means the value of all out-of-the-money options -- calls with strikes above the purchase price or puts with strikes below the purchase price -- will go to zero. That means there can be instances where owning call options, especially a longer-dated one with a significant amount of time premium, might actually result in a loss unless the buyout is done at a price above the option's breakeven point.

For example, right now, U.S. Steel (X Quote) is rumored to be a takeover target. With shares trading around $73, the January $80 call with a 2008 expiration is valued around $8 per contract, giving it a breakeven point of $88 per share.

Let's assume that sometime in the next month, U.S. Steel agrees to be bought for $85 per share, or a healthy 15% premium to today's price. The value of those $80 LEAP calls would decline to just $5 per contract, resulting in a $3 loss. If shares of U.S. Steel were to climb to $85 on their own merit or on speculation -- that is, without a confirmed deal -- the value of those options would increase to around $14 per contract, a nice $6, or 75%, profit.