Options: Zimmer Rolls on Takeover Buzz

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

Call buying activity on Zimmer Holdings(ZMH Quote) spiked this morning on rumors that Johnson & Johnson(JNJ Quote) might be planning to take over the surgical products provider.

About 7,500 May 45 call options have traded so far today. The bulk of that volume happened in the first half-hour of trading, when approximately 5,200 contracts changed hands. Current open interest in these calls is 4,835.

The May 45 calls are currently trading around 75 cents, already up 23 cents from yesterday's close with implied volatility at 38.8. At that price, the buyer needs the underlying stock to be trading higher than $45.75 to be in-the-money at expiration.

Zimmer shares climbed 24 cents or about 0.55% to $44.01 from yesterday's close. The company did not report any significant news today, but the stock's rally during the past couple of weeks could be follow-through from company beating analyst estimates for the first quarter. The company reported on April 23 and subsequently rallied more than 4% in that session alone.

On Monday, we saw heavy call-buying activity because of takeover buzz that Danaher(DHR Quote) had plans to acquire Black & Decker(BDK Quote). Nearly 9,000 May 45 Black & Decker calls traded in the first hour of trading that day vs. open interest of 3,260 two days prior.

Call-buying activity such as this does not automatically mean that investors should run out and buy shares of Zimmer, but the bulls would certainly welcome more mergers and acquisitions activity, which could indicate corporate America is becoming 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.