We were encouraged by the three new takeover deals announced last week, but upon closer review, they did not seem to be very attractive from an options perspective. However, the lack of any increase in stock or options volume prior to the announcements was noticeable. For now, it appears insider trading has been greatly reduced.

Vulcan Materials Company (VMC)
On Monday, Martin Marietta (MLM) proposed a hostile takeover offering one-half of one MLM share for each VMC share. Monday the options volume was 22,343 contracts, but by Friday, it had declined to 3,256 contracts while the implied volatility declined from 51 to 44. It appears this will be long drawn out affair and there is not much speculative enthusiasm since there does not appear to be any third party bidders interested in offering a better deal. We will review this one again, but for now, we do not see any interesting trade ideas.

Novellus Systems, Inc. (NVLS)
On Wednesday, Lam Research (LRCX) announced that it had reached an agreement to acquire NVLS in an all-stock deal giving 1.125 shares of its stock for each NVLS share, indicating a 28% premium. This deal could be more interesting since there are several competitors they may now be inspired to make offers for NVLS. In addition, several law firms announced they were initiating investigations into potential claims against the board of directors of NVLS. While this one should generate more options interest it was not yet evident as the options volume declined to 3,194 contracts on Friday compared to Thursday's 51,960 contracts and the implied volatility was almost unchanged for the week. Perhaps the activity will pick up in 2012. 

RSC Holdings, Inc. (RRR)
On Friday, United Rentals Inc. (URI) said it has agreed to buy rival equipment rental company RSC Holdings for about 1.9 billion in cash and stock. The 18-per-share offered price is a 58 percent premium to RSC's closing price on Thursday. Completion of the approved deal is expected in the first six months of 2012. When the deal closes, each outstanding share of RSC common stock will be converted into the right to receive 10.80 in cash and 0.2783 of a share of United Rentals common stock. The deal is subject to closing conditions, including regulatory approval and clearance of any antitrust hurdles. Unfortunately, from an options perspective this one is not attractive since the options volume is much too thin, with only 1,966 contracts traded. However, if a third party enters the bidding volume and liquidity it could increase.

Yahoo! Inc. (YHOO)
YHOO is a digital media company in the process of reorganizing or perhaps being sold. Although having declined from 16.50, high options volume continues based upon speculation that Jack Ma and others are working on a plan to acquire the company. Rumors have the price in the 18-20 range.

The current Historical Volatility is 26.69 and 24.03 using the Parkinson's range method, with an Implied Volatility Index Mean of 48.54, down from 50.19 the prior week. The IV/HV ratio is 1.82 and 2.02 using the range method to calculate the HV. The put-call ratio at .34 remains extremely bullish, as it has been for several weeks. On Friday's there were nine strike prices with volume in excess of 2K contracts. The January 17.5-call option volume was 33,668, the 16 call was 60,179 and the 14 call was 45,673, although a good portion could be spreads being rolled over from December to January. Friday's option volume was 326,207 contracts compared to the 5-day average of 171,950 contracts.

Our last suggestion used January options. Here is another, this time with April options for the call spread.

 

 

Use a close back below 14.50 the SU (stop/unwind) or be prepared to take the stock by assignment in the event it closes below 14 on the January expiration. If so, then the plan is to sell calls against the stock position. Otherwise, the plan is to keep selling the puts to reduce the cost of the call spread.

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