Rumors Spur Health Net: Options
By Jud Pyle, CFA, chief investment strategist for the
CHICAGO (
) --
Kraft Foods'
(KFT)
' 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)
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)
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)
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.
Call buying like this does not mean that investors should run out and buy shares. After all, following the buying that we saw on speculation in the spring, the shares never managed to appreciate to a price higher than the stock price. But it is worth taking note of this unusual option activity in case you agree that there could be some upside to the shares.
-- Written by Judd Pyle in Chicago
Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."
