Rumors Spur Health Net: Options

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

CHICAGO (TheStreet) -- Kraft Foods'(KFT Quote)' attempt to acquire Cadbury set the stock market into rally-mode on Tuesday.

Investors took heart in the fact that companies might see value in acquiring stocks, so they thought they would buy some, too. Options in Health Net (HNT Quote) were active as the frequent takeover rumors in this stock surfaced again.

Looking at the September 17.5 calls, we find that more than 6,400 traded during the first four hours of trading Tuesday. Open interest in these calls is just 21 contracts, according to the Sidewinder report at www.ONN.tv.

The most noteworthy point about this volume is most of the activity is on the buy side, meaning there are more buyers of these calls than sellers. To illustrate how dramatic the buying is, we saw at one point Tuesday, the price of the calls actually rose by more than the price of the shares. The stock was up seven cents to $16.60, but the calls were up 10 cents to 30 cents. That is the result of buyers pushing up the implied volatility of these September calls.

As we mentioned, this call buying activity could be a bet by an investor that HNT is a target for acquisition by a larger HMO. Wellpoint(WLP Quote) is one possible buyer.

This is not the first time that HNT has been rumored as a target. In fact, in the last three years, the company has been the subject of much takeover speculation, and short-dated call buying resulted. Just last March, we saw heavy call buying in the May and April 17.5 calls. Prior to that, there were rumors in 2007 that Aetna(AET Quote) might acquire the company at a price in the high $60's. Some shareholders might wish that that had come to fruition, as shares of HNT are down more than 70% since then.