Options: Black & Decker Call-Buying Spike

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

Rumors that Danaher (DHR Quote), a technology and manufacturing company, is interested in taking over Black & Decker (BDK Quote) fueled significant call activity in the first hour of trading Monday.

Black & Decker shares climbed nearly 2% to $40.83 this morning. This rally follows announcements last week that the company cut its quarterly dividend by 71% to 12 cents a quarter.

Looking at the May 45 call options, we see that approximately 8,800 contracts traded in the first hour of trading this morning. Current open interest in these calls is 3,260.

The May 45 calls traded this morning for around 40 cents, up about 20 cents from the beginning of the day. At that price, the buyer needs the stock to be trading higher than $45.40 to be in-the-money at expiration.

Such big call-buying activity has caused implied volatility to increase. With the BDK call options up to 40 cents, implied volatility is currently at 56.8, up from 49 earlier this morning.

At the beginning of April, I highlighted significant call-buying activity in Cree (CREE Quote) amid takeover chatter that Intel (INTC Quote) was interested in buying the company. The April 25 call options that we highlighted were trading for $1.05 with the stock near $23.90. Since that time, these calls expired in-the-money, with CREE shares closing at $26.91 on expiration Friday, April 17.

Call-buying activity such as this does not automatically mean that investors should run out and buy shares. But the bulls in the market would certainly welcome more mergers and acquisitions activity that indicates corporate America is getting more bullish on the economy.

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.