Cubist Could Be in Play, Options Show

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

Cubist Pharmaceuticals(CBST Quote) is up more than 12% today with heavy options activity amid rumors the company will be bought by Swiss drug giant Novartis(NVS Quote).

According to speculation, which is more specific than other rumors, Novartis will announce a deal Monday to purchase Cubist for $1.6 billion, or $26 a share. This one meets our "three-V" evaluation criteria of volume, volatility, and valuation:

Volume: More than 19,200 Cubist calls traded in the first 30 minutes of today's session, a ridiculously high number right out of the gate against only 118 puts. By comparison, normal full-session volume for March was just 700 Cubist calls per day, according to OptionMonster's real-time tracking systems.

Volatility: Implied volatility for Cubist has popped from a median of 57% to 115% in the April at-the-money strike.

Valuation: Cubist has been falling steadily since the beginning of the year, when its shares were trading at well over $25. The stock hit its 52-week low of $13.81 on March 5 but has been climbing since then.

The valuation makes us believe that Cubist could indeed be in play. Novartis, meanwhile, is down 2.3% to $37.45 in afternoon trading.