The Wall Street Journal-20080112-Some Countrywide Calls Drop After Takeover Deal- Traders on the Lookout For Higher Offer See Value of Contracts Fall
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Some Countrywide Calls Drop After Takeover Deal; Traders on the Lookout For Higher Offer See Value of Contracts Fall
Traders looking for a richer offer for Countrywide Financial Corp. saw the value of their contracts plunge.
Bank of America Corp. agreed to buy the troubled mortgage giant in a $4 billion all-stock deal, which values Countrywide at $7.16. The shares fell 18% to $6.33.
That is bad news for anyone holding call options at a higher strike price.
On Friday, the January 7.50 calls, which give holders the right to buy the stock at $7.50 when the contract expires at the end of next week, saw their value fall by $1.30 to 10 cents. Only 16,332 calls traded, versus open interest of 47,515.
The January 10 calls saw their value fall 56 cents to 40 cents on similar scant activity reltive to open interest.
There was activity in Countrywide's options on Thursday that got the attention of Jon Najarian, co-founder of OptionMonster.com. About 300,000 calls changed hands, and Mr. Najarian said he believes many of those were purchased before the deal was revealed.
"To us this means the likelihood of someone being tipped off quite high," he said. "Like Burj Dubai Tower high."
Two trades in particular hit Mr. Najarian's radar: a block of January 5 calls on the American Stock Exchange and another batch of the same on the Philadelphia Exchange, both preceding the announcement. Countrywide wasn't available to comment.
On Friday, nearly 335,000 puts traded, against 204,200 calls.
Merrill Lynch & Co., meanwhile, saw bullish sentiment after taking a $15 billion charge. Shares rose 5% to $54.69.
Traders snapped up January 55 calls, with 33,422 contracts trading, versus open interest of 23,644.
Overall sentiment wasn't as positive. Nearly 170,000 puts traded, against 78,560 calls.
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Rob Curran contributed to this article.
