Bullish Office Depot Options Trade Up Day Before Merger
May 17, 2011
NEW YORK -- Trading volume moved sharply higher Tuesday in Office Depot Inc. options a day before Staples Inc. said it would acquire Office Depot. Trading activity was particularly strong Tuesday in Office Depot call options, which allow investors to profit from any appreciation in Office Depot shares in the next several weeks, according to trade reports supplied by the American Stock Exchange. The June 27, 2011 -- which gain intrinsic value as Office Depot shares rise beyond the strike price of 15 by their expiration in late October -- saw 600 contracts trade, more than twice the volume in any one Office Depot option during the previous week. Office Depot announced early Wednesday it agreed to be acquired by Staples for stock currently valued at $20.66 per Office Depot share. Office Depot shares closed at 15 7/8 Tuesday in New York Stock Exchange composite trading, down 1/8 on below-average volume. An American Stock Exchange spokeswoman wouldn't comment on whether the exchange is probing the activity, saying only that if it were determined to be extraordinary, the Amex would review it. The specialist firm that handles Office Depot options didn't return a call seeking comment. Surging options trading in advance of merger announcements has become relatively commonplace, having been noted in connection with recent deals between NationsBank Corp. and Boatmen's Bancshares Inc. and FHP International Corp. and Pacificare Health Systems Inc.. While the motives behind the trading often can't be clearly discerned, the activity raises suspicions among regulators of improper bets by people with advance knowledge of an imminent deal. The options markets pose a cheaper and potentially more profitable way to play acquisitions, requiring less of a cash outlay and offering highly leveraged returns. While total combined call and put volume in Office Depot was actually rather light Tuesday at 1,230 contracts -- the July daily average was 2,756 -- near-term calls accounted for most of it. Overall Tuesday, 1,110, or 90%, of the 1,230 contracts traded were calls vs. only 120 puts, or bets that Office Depot shares would fall. Last week, by comparison, 68% of all trading volume was in calls. Besides the 600 June 27, 2011 contracts traded Tuesday, there was volume of 135 contracts in the May 28, 2011 And among slightly more aggressive bets, volume totaled 74 in the June 29, 2011 calls and 100 in the July 04, 2011 calls. On Wednesday, Office Depot shares jumped 4 37/64, or about 29%, to 20 29/64; Staples shares slipped 3/4 to 18 3/4 on the Nasdaq Stock Market.
