Eastman Chemical Co. (NYSE:EMN) – Investors cheered the deal announced by Eastman Chemical Co. and Solutia, Inc., sending shares in both companies up sharply on Friday. Eastman will reportedly pay $3.38 billion for Solutia, the largest takeover in the diversified chemicals space in more than two years. EMN’s shares are currently up 6.0% to stand at $49.93 as of 11:30 a.m., and have rallied nearly 25.0% since the start of the New Year. Options activity on Eastman following news of the deal suggests some strategists expect shares in the manufacturer of chemicals, plastics and fibers to extend gains in coming months. Investors are favoring call options on EMN, exchanging more than 2.3 calls on the stock for every one put option in play. Call volume is heaviest in the March expiry, more specifically at the $50 and $52.5 strike prices. Nearly 3,000 calls have changed hands at the Mar. $50 strike against open interest of 379 positions. It looks like most of these contracts were purchased for an average premium of $3.10 each, thus positioning buyers to profit in the event that Eastman’s shares rally another 6.3% to surpass the average breakeven price of $53.10 by expiration. Bullish activity spread to the higher Mar. $52.5 strike, where investors appear to have purchased more than 1,000 calls at an average premium of $1.42 apiece. Higher-strike call buyers may profit at March expiration if shares in the chemical producer surge 8.0% to exceed the average breakeven price of $53.92. Eastman’s shares last traded above $53.92 back in May 2011. The Company reported fourth-quarter and full year earnings after the closing bell yesterday.
Solutia, Inc. (NYSE:SOA) – Shares in St. Louis, Missouri-based Solutia, Inc. jumped 43.0% to an intraday high of $27.89 on Friday on news Eastman Chemical Co. agreed to buy the Company in a deal reportedly worth $3.38 billion. Investors holding call options on SOA in advance of the takeover news saw the value of their positions sky-rocket overnight. On Monday, for example, one trader appears to have purchased 100 calls at the Feb. $20 strike for a premium of $0.35 per contract. At last check, the deep in-the-money Feb. $20 strike calls trade at more than 21 times that amount, or $7.60 per contract. Paper profits available to the investor at those levels amount to $7.25 per contract for huge gains of more than 2,000% on the position. Finally, huge profits are at the fingertips of a Mar. $20 strike call buyer who appears to have purchased 250 contracts at $0.50 each during the final trading session of 2011. The $7.50 last traded price on the Mar. $20 strike call represents a 1,400% increase in premium over the original cost of the option contracts. Investors may have initially purchased the SOA calls to speculate on the stock’s performance following the release of fourth-quarter earnings this morning.
Oshkosh Corp. (NYSE:OSK) – Shares in the maker of defense trucks and specialty vehicles are off their session lows, but continue to trade in the red, down 1.25% at $24.49 as of 1:20 p.m. in New York. Earlier today, shareholders voted on board of director candidates backed by activist investor Carl Icahn, who took a 9.5% stake in the company in June, and candidates backed by Oshkosh CEO Charles Szews. According to reports of preliminary results of the vote, shareholders backed 12 out of the 13 seats backed by the Company’s Chief. The Oshkosh, Wisconsin-based Company popped up on our ‘hot by options volume’ market scanner today after a large number of calls changed hands in the front month. Call buying on the maker of defense vehicles may be the work of an investor expecting shares to rally sharply ahead of February expiration. Nearer-term impetus for the call action may be Oshkosh Corp.’s upcoming first-quarter earnings release ahead of the open next Tuesday. It looks like more than 5,000 call options changed hands at the Feb. $26 strike against open interest of just 108 contracts. The majority of the calls appear to have been purchased for an average premium of $0.49 apiece, thus positioning the buyer to profit in the event that shares in OSK surge 8.2% to surpass the average breakeven price of $26.49 at expiration. The call options were not marked against a simultaneous transaction in the underlying shares today, however, this does not rule out the possibility that the long calls are a hedge against a short position in the stock rather than an outright bullish stance. Shares in Oshkosh are up 10.2% year-to-date, but continue to trade at a near 40.0% discount to their February 4, 2011, 52-week high of $40.11.