Options as Wolf Detectors for Stock Takeovers

Topic: Options as "Wolf Detectors" to Find Takeovers

Dear Options Trading FAQ:

'Nuff already with that mumbo-jumbo exercise/assignment/settlement jazz. Say something I can unnerstand. Gimme a sure thing in the daily double and I'll buy ya lunch.

New to this Options Stuff

Dear Nouveau Poor:

Alright already. Read on my good options man...

Dear Options Trading FAQ:

There has been much speculation about the possible takeover of a certain airline. What would you say about buying a straddle (both calls and puts) on this one?

Up in the Air

Dear Frequent Flyer:

I'd say that at this point the options must fully reflect the possibility of any takeover action. That means that unless the deal does occur (and at a great price), it would be hard to make money on a long straddle. In fact, many professionals may elect at this point to short that same straddle, betting on the non-occurence of the deal or, at least, a delay so as to collect from the time decay. It is rather difficult to play takeovers with such inflated options. It becomes a real crapshoot when everyone uses the calls to bet on a buy-out. Smart stock players do it just the other way around. That is, they scan for interesting action in equity options to point out good stock plays. Called "wolf detectors" this unusual action in the options can often tip off impending takeover action in the stock.

Good luck and trade well! Remember, an educated options trader is the best options trader. Browse these books books on trading options.

Tags: Options Trading, Options Valuation, Options Pricing, Options Strategy

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