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