Last Friday, I decided to feature Schering-Plough (SGP) in my daily column Option Activity Alert. I had been noticing unusually heavy call volume on the stock for weeks, and I finally decided to dig into the activity and offer my 2 cents.
As it sometimes happens, my 2 cents ended up being worthless on Monday, when Merck (MRK) launched a buyout bid to acquire SGP. As a result, the latter stock cruised right through the 20 level -- which I cited on Friday as stubborn resistance. As another result, I'm considering adding a disclaimer to all of my future columns: "Surprise buyout bid notwithstanding."
But seriously, enough about me. SGP is rallying again today, with analysts at Wachovia floating the notion that Johnson & Johnson (JNJ) is well-positioned to make its own acquisition offer. "Our merger analysis indicates that J&J could pay a 10 percent premium over Merck's original offer and the deal would be accretive for J&J in the first year whether or not Merck exercised its right to buy out its cholesterol joint venture with Schering-Plough," said the brokerage firm.
In the wake of Monday's M&A developments, call volume continues to dominate on SGP. Yesterday, traders on the International Securities Exchange (ISE) bought to open 10,389 calls on the stock, compared to just 1,734 puts.
In the front-month series, the bulk of Monday's volume was centered around the 22.50 strike. Open interest on this out-of-the-money call swelled by about 3,500 contracts after yesterday's trading settled out.
Even though my opinion could be rendered worthless by unexpected news developments as soon as tomorrow, I think there are a few points worth noting. First, SGP is trading today near $21 per share, even though the MRK offer values the stock at $23.10. Yet, on an intraday basis, the stock hasn't climbed any higher than $21.25 since the buyout bid hit the Street.
Judging by Monday's call trading, it seems that some investors fully expect to cash in on those out-of-the-money 22.50 options prior to March expiration. However, the market is so far unwilling to assume a successful acquisition by Merck, with SGP hovering about 10% below the offer price. Despite today's speculation about a potential bidding war for the company, it looks like there's still some lingering skepticism about the buyout deal.
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