Call Activities Could Be Key to Spotting Future M&A Targets

by: Kelvin Schulle

For whatever reasons, M&A usually happens along with a spike of call option activity. Traders track the massive call purchases and speculate that a company may become a takeover target. The call buyers are usually those who are close to the involved companies, or research firms that have better insight into both companies. Retail investors also chase to long calls or short puts. It is worth noting that several single massive call contracts along with high volume overall call options are key to spotting successful M&A. Here are a few examples:

1. XTO Energy (XTO) was acquired by Exxon Mobil (NYSE:XOM) in January; The Jan and Feb calls were massively bought ahead of that announcement, a few huge call contracts at strike price $40 were purchased with volume over 10K each in January.

2. The same thing happened to Sandisk (SDNK) in September 2008, before Samsung (OTC:SSNLF) offered $26 per share, large call contracts were passed through with each volume over 10K. The deal was rejected by Sandisk, however. Apparently somebody may have speculated ahead of the possible deal.

History offers a lesson that investors may use to spot the next major M&A possibilities. The following companies are now seeing high volume call activities with a few large volume contracts.

1. Arch Coal (ACI): With the economy improving, both thermal and metallurgic coal demand will rise. Recently, April $25 call options have been bought with heavy volume. In particular, one contract over 15K was passed through this week. Arch Coal is also undervalued compared to Massey Energy (NYSE:MEE) and other coal names. the company sells both thermal and metallurgic coal both domestically and to Asian countries. The speculative bidding may come from Consol Energy (NYSE:CNX) or BHP Billiton (NYSE:BHP).

2. China Green Agriculture (NYSE:CGA), this is a growth story in the agriculture sector. The company has sequential revenue growth of over 20% QoQ. It sells fertilizer in the Chinese market. It has been noted that the agriculture sector is the only sector in China that is excluded from monetory tightening. The call activity was seen in March and April calls at strike prices of $15 AND $17.5. It has also become clear that large fertilizer companies such as Mosaic (NYSE:MOS) and Potash (NYSE:POT) are planning to enter the Chinese market.

Disclosure: Long POT, ACI, MOS, XOM