Alza-Deal Talk Gooses Options Plays

Alza's (AZA Quote - Cramer on AZA - Stock Picks) call options were hopping this morning after The Wall Street Journal reported that Johnson & Johnson (JNJ Quote - Cramer on JNJ - Stock Picks) was in talks to buy the company for more than $12 billion in stock.

Volatility Index
Today	% Change
33.31	-4.58
Source: ILX

The report sent shares of Alza surging $7, or 23%, to $37.05. Options action was robust as the prices of call options soared. The Journal reported that while exact terms of a deal couldn't be determined, J&J is planning a stock swap that would value Alza between $42 and $48 a share. Shares of J&J slumped $2.77 to $85.44.

Nasdaq Volatility Index
Today	% Change
70.59	-0.16
Source: ILX

From time to time, there has been unusual activity in Alza's options, including heavier than usual volume and a big spike in the prices of the options. A recent example was in early February, when the volume and prices of the options soared.

Paul Foster of 1010WallStreet.com in Chicago said Alza's ramp-up this morning shows investors are putting confidence in a J&J deal. Foster noted that the implied volatility -- the market's estimate of how much the underlying security can move -- on Alza options was markedly high on Friday, closing out at 65, while it has only risen up to 68-69 today. Options volume, however, was unremarkable on Friday.

Optionswise, there was some activity in out-of-the-money calls on Alza, with a decent amount of volume seen in the April 40 calls. The April 40 calls soared 1.15 ($115) to 1.40 ($140) on volume of 2,100 contracts, compared to open interest of 3,309.

Meanwhile, call options with strike prices above 40, however, weren't generating much interest. The April 42 1/2 calls were seeing a bit of volume on the American Stock Exchange, with 197 contracts trading. The calls rose 0.30 ($30) to 0.60 ($60).

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The Nasdaq Stock Market announced this morning it is partnering with the London International Financial Futures and Options Exchange to list and develop single-stock futures for U.S. and European customers.

The contracts will be listed on Liffe's electronic trading platform. Liffe already lists single-stock futures on seven U.S. companies. U.S. investors, however, currently cannot trade single-stock futures and will have to wait until December before they can. Legislation last year was enacted that lifted the nearly 20-year ban on the trading of single-stock futures in the U.S.

The move represents a competitive threat to the U.S. options industry because the single stock futures could be used for hedging and speculation, the same way listed options currently are used.

Nasdaq and Liffe said they will form a U.S.-regulated entity, which will list single-stock futures on Liffe's trading platform.

Liffe initially listed 25 single-stock futures products in late January. According to Liffe, single-stock futures can begin trading on Dec. 21.