Options traders jumped into the brokerage-stock frenzy after Swiss bank and broker
agreed to buy U.S. retail broker
in a $10.8 billion deal.
Talk that the deal signals more consolidation in the brokerage industry had brokers' shares soaring and options trading heavily Wednesday afternoon. One options trader at a big Wall Street firm noted heavy put-buying in PaineWebber options, as players hedged positions in case something goes wrong with the deal. While trading leaned markedly to the call side for options expiring in July and August, the action in contracts expiring in October was dominated by puts.
UBS agreed to buy PaineWebber for $73.50 a share, marking a hefty 47% premium to PaineWebber's closing price of 49 15/16 Tuesday. The deal is expected to be completed in November. On the news, shares of PaineWebber were up 16 15/16, or 33.9%, to 66 7/8, while shares of UBS were tumbling 13 1/16, or 8.8%, to 135 11/16.
The October 60 puts were popular, with 689 contracts trading on the
American Stock Exchange
, compared to open interest of zero as of Tuesday's close. The puts were trading up 3/4 ($75) to 3 1/8 ($312.50). Meanwhile, 480 of the October 60 puts traded at the
Chicago Board Options Exchange
. The contracts on the CBOE were trading up 1 1/4 ($125) to 3 1/4 ($325). Open interest refers to the number of contracts in existence.
The absence of open interest in the options before Wednesday indicates market participants were quickly opening new positions on news of the deal. Action in PaineWebber options has garnered attention from options market analysts and traders in the
has reported. Rumors have had the brokerage firm on the block for many years.
What Else Is Popular
Volume in other brokerage-stock options picked up markedly late Tuesday afternoon and was notable Wednesday, according to analysts. On Wednesday, shares of brokerage firms were soaring amid speculation of which firm might be the next taken out.
analyst Judah Kraushaar said in a note Wednesday morning that "takeover speculation may grow regarding other second-tier securities firms and for certain asset managers." The analyst named
as possible targets, though he added that "most of these firms seem very independent-minded."
Lehman Brothers options action was healthy as the stock surged 4 to 110 7/16. Lehman August 105 in-the-money calls were seeing notable interest, with 202 contracts trading on the
American Stock Exchange
, compared to open interest of 93 contracts as of Tuesday's close. The August 105 calls were trading up 3 3/4 ($375) to 10 1/8 ($1,012.50). There was also some interest in July options on Lehman, but action there was minimal for the most part, most likely because those options expire at the close of trading on July 21.
On Tuesday, about 5,100 Lehman options traded, well above the average of 1,800 over the last month, according to Paul Foster of
Options volume on
, the St. Louis-based brokerage firm, has also increased recently. On Tuesday, call volume was heavier than usual, Foster said, noting that volume over the last month has averaged about 320 contracts a day. He pointed out that activity in the options was up again Wednesday. On Wednesday, nearly 150 August 45 calls traded. The calls were up 1 1/8 ($112.50) to 2 1/16 ($206.25).
Implied volatility is the annualized measure of how much the market thinks a stock or index can potentially move and is a critical factor in an option's price. When market makers raise implied volatility, they are expecting bigger movement in underlying securities' price, whether up or down. Implied volatility readings often rise ahead of an earnings report or amid speculation that a company might be taken over.
Options action on
Tucker Anthony Sutro
, a Boston-based brokerage firm, also spiked Tuesday, when about 300 options contracts traded and implied volatility jumped. Since then, implied volatility on the options has fallen to 45 for July 20 options, down from 57 Tuesday, Foster said. Shares of Tucker Anthony were up 7/8 to 19 1/2. There was a little interest in Tucker Anthony options Wednesday on the
, with a total of 110 contracts changing hands. All the contracts trading were call options.