Buffett's Berkshire: Buying All of Burlington?

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

When evaluating rumors, you have to decide if the chatter meets the three Vs: volume, volatility and valuation. Let's apply it to today's speculation about billionaire investor Warren Buffett.

Berkshire Hathaway(BRK.A Quote), which owns 22% of Burlington Northern(BNI Quote), is being chatted up as a potential buyer of Burlington Northern along with Chinese railroad operator Guangshen Railway(GSH Quote).

Guangshen Railway is trading down 71 cents to $16.11 today, which we could attribute to the 3.4% selloff in the broader market as easily as the rumor of its interest in Burlington Northern. Berkshire, led by Buffett, is also down 4.8%.

So let's break down the three Vs to see if Burlington Northern could indeed become part of the recent takeover wave:

Volatility: Implied volatility peaked at 55% in early March and stood at 47% Friday. Today, Burlington Northern April calls spiked up to 65% again, well surpassing the March highs. May implied volatility stood at 63%.

Volume: Normal full-session stock-trading volume over the last three months has been 4 million shares, but in the first two hours alone today 2.3 million changed hands.

Valuation: Current valuation of Burlington Northern is $20 billion, and our models indicate that a takeover would be at least $26 billion, which is a tough raise right now.

So Burlington Northern meets only two of our three V's, but that doesn't mean there will not be more talk as Burlington Northern trades at about $60.50 per share, down on the day but still double some of its biggest competitors.