Takeover Rumors Renew Optimism

By Jon "DRJ" Najarian, co-founder of OptionMonster

A number of takeover rumors have been making the rounds, an encouraging sign that capitalistic optimism is returning to the markets.

OptionMonster's hedge fund network estimates that mergers and acquisition rumors were up some 80% in the last week alone. This is clear evidence for traders that those who had left the market are pouring back in.

Here is a sampling of stocks that saw unusual buying fueled by takeover speculation last week:

Black & Decker(BDK): A rumor that Danaher(DHR) could buy drove shares to $32.41 from $26.35.

MEMC Electronic Materials (WFR): A rumor that BASF could buy drove shares to $19.26 from $15.26.

Allergan(AGN): A rumor that either Baxter(BAX) or GlaxoSmithKline(GSK) could buy drove shares to $50.89 from $39.53.

On Friday, someone tried to start a takeover rumor that retailer Lowe's(LOW) might be interested in Whirlpool(WHR). We looked at the option volumes and noted that, just two minutes before the rumor surfaced, someone bought 408 of the April 35 calls for $1.50. The stock spiked to $35.88 from $33.19 in just minutes, but then we noted the unusual selling of calls, which to us signaled a classic "pump and dump" move.

Here are some key questions that can help evaluate such actions:

Is volatility expanding? Look to see if the options are becoming more expensive without being driven higher by shares of the underlying rising.

Are more calls being bought on the offer than sold on the bid? When we see equal volumes sold on the bid as bought on the offer, then we don't have unusual activity.

Is the subject of the takeover rumors relatively cheap compared with its peers and or recent valuation? Or has it already moved up and is thus a less likely acquisition target?

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