* Short term, out of the money purchase of February calls stands out
* TRA married put, stock deals indicate bullish betting traders
CHICAGO, Feb 16 (Reuters) – Though Terra Industries TRA.N Has long been an acquisition target, some traders appear to have placed bullish bets on Terra options at the right time just a week before a takeover bid was announced.
Norway’s Yara BE HELP agreed on Monday to buy fertilizer maker Terra Industries TRA.N for 4.1 billion US dollars, strengthening its presence in the US Corn Belt region. [nLDE61E1PM]
Terra attracted strong call options trade on February 9, possibly another case of a buyout preceded by a questionable trade in the options market.
The excitement has led at least one options trader to wonder if the news got some investors ahead of schedule.
Jon Najarian, a founder of the web intelligence site optionMonster.com, noted unusually strong action in Terra’s bullish call options prior to the announcement.
“This activity indicates to us and our models that someone had an advanced understanding of this takeover bid from Yara International. If I were the regulator I would look into who made calls and puts a week ago and see if it was just good timing or something more, ”he said.
Yara’s offer valued Terra at USD 41.10 per share, representing a premium of 23.6 percent over Friday’s closing price.
Investors often resort to stock call options, which give them the right to buy shares in the company at a set price within a certain period of time in order to speculate on a possible price increase. A put gives the right to sell the stock.
According to the Options Clearing Corp, a total of 26,116 calls and 5,335 puts were traded in Terra in the week ending February 12th.
Call trading was notable on February 9, when approximately 19,000 call contracts traded versus 400 puts, more than three times the most recent average daily call volume, according to options analyst Trade Alert.
“In the week leading up to this tender, our systems showed that trading in terra-puts in connection with stocks was suspect,” said Najarian. “Traders also targeted calls of $ 35, $ 37 and $ 40 in February and March this week and February 9, respectively.”
Joe Kunkle, a founder of OptionsHawk.com, highlighted the unusual call activity on his website.
“On February 9, for $ 32 stocks, I found it rather strange that a buyer for 4,000 February calls would go from $ 37 to (a premium of) 12 cents, 15.6 percent out of the money, and just one Week and half before the end, ”said Kunkle.
A trade of this size that opened out of the money so close to the end of February 19th seemed “lazy,” he said.
With Terra shares rising $ 7.44 to $ 40.69 on Tuesday, the $ 37 calls closed in February at $ 3.70 per contract. For the merchant who bought those 4,000 calls for 12 cents each, the profit was potentially $ 1.4 million.
It can be difficult to tell whether unusual trading patterns in a target company’s options are due to inside information, as it could also reflect speculative betting.
It is true that some analysts and investors have been speculating for some time that Yara could make an offer for Terra, as both companies have a strong focus on nitrogen-based fertilizers such as ammonia, urea and UAN.
Canadian fertilizer maker Agrium, one of Terra’s biggest rivals, also reported a bullish forecast for 2010 on February 9, pushing its shares up more than 5 percent that day.
This may have prompted investors to buy call options in Terra in anticipation of Terra’s upcoming results on February 18th.
Trade Alert President Henry Schwartz also noted that the $ 37 / $ 40 call spread sold for a net price of 25 cents per spread in March and traded 4,335 times on February 9 – a trade that is based lost money on Tuesday’s stock price and option premiums.
“At first glance, the call purchase in February looks suspicious. However, the March call spread was sold shortly thereafter and is likely to have come from the same initiator, ”he said. “Taken together, it doesn’t look like these trades will benefit from the deal.”
Terra officials declined to comment. The US Securities and Exchange Commission, which is investigating unusual stock and option activity, declined to comment.
U.S. securities regulators are investigating unusual activity at Airgas Inc ARG.N Call options before a $ 5.1 billion offer was announced for the industrial gases company, a person familiar with the investigation said on Feb. 10. (Additional reporting by Euan Rocha in Toronto; editing by Kenneth Barry)
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