Options traders have been turning deal chatter into quick profits.
Thursday afternoon, trading in animal health company Zoetis was halted on a Wall Street Journal report that the company was approached by Canada-based drugmaker Valeant Pharmaceuticals for a potential takeover. When the stock reopened, shares soared more than 11 percent into the close. And that meant a cool win for one smart trader.
And seemingly right as the news hit, one trader purchased 300 of the June 26 weekly 50-strike calls in Zoetis for 34 cents. Since buying a call option allows one the right to purchase a stock at a set price for a given time, this is a bullish bet that the stock would be above $50.34 by Friday.
“Right after the stock spiked those calls appreciated dramatically,” added Nathan, founder of RiskReversal.com. “They were purchased for 34 cents, which is about $10,000 in premium for those 300 calls,” and after the halt they were offered at $4.80 or worth about $144,000. That $144,000 represents more than $130,000 of pure profits, meaning the trader made 1,300 percent in just a matter of minutes.
This isn’t the first time options traders have made money on takeover talks. Just last week one trader cleaned house on reports of a Martha Stewart deal. In that case, a trader was able to make more than $200,000 in just a matter of minutes.
But Nathan warns that this is not necessarily the smartest strategy for investors. “It seems a bit like a frenzy here. I don’t think you want to go out and buy calls for every stock you hear is going to be taken over or rumors floated.”
To note, CNBC’s David Faber is reporting Friday that Valeant is not going to pursue a deal for Zoetis.