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

Shares of Cree ( CREE) were up nearly 6% Wednesday to $24.94 in the last hour of the trading day. Rumors that Intel ( INTC) might be interested in buying the company are fueling the rally. The possibility of a takeout is also fueling short-dated call-buying.

Looking at the April 25 calls, we find that more than 7,600 had traded in the first 45 minutes of trading this morning. Open interest in these calls is 1,820, according to the Sidewinder report at www.ONN.tv. As the day has worn on, the volume in the calls is now up to more than 16,000.

The April 25 call options traded this morning for around $1.05 with the stock near $23.90. At that price, the buyer needs the stock to be above $26.05 to be in the money at expiration. Since that time, the stock has rallied with the rest of the market, and the $25 calls have risen to $1.45.

The relentless buying of these calls has caused implied volatility to increase. Last night, the April 25 calls closed at 68 cents vs. a stock price of $23.53. That computed to an implied volatility of 61. Now with the options at $1.45 and the stock at $24.94, the implied volatility is up to 69.

Looking back at two examples of call-buying on takeover speculation from last week, we can see some examples of what can happen when the frenzy around takeover speculation subsides.

On March 23, I wrote about speculative call-buying in Redhat ( RHT), noting that the April 17.5 calls were trading around $1.05 with the stock at $16.30. Since that time, shares of RHT have continued to rally up to $17.70. But the April 17.5 calls are unchanged near $1.05.

So buying the shares would have worked, but piggy backing on the options, not as much. This is because implied volatility has declined so much as to leave the option unchanged despite the continued rally in the shares.

A second example from last week was on Wednesday, March 25, when we highlighted call-buying in MEMC Electronics ( WFR). There we found that the April 20 calls had traded 75 cents with the stock trading at $18. Since that time, the shares have slid back closer to $17, and the options have dropped to 45 cents.

So, call-buying like this does not automatically mean that investors should run out and buy shares. However, seeing an increase in takeover activity would certainly be a welcome event for the bulls, as it would indicate that corporate America is getting more bullish on the prospects for 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.

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."

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