NEW YORK (Reuters) - Cubist Pharmaceuticals Inc options had one of their most active weeks this year last week ahead of Monday's announcement that Merck & Co will buy Cubist for a hefty premium.
One series of trades on Thursday appears to have generated at least a 10-fold windfall profit on paper.
Merck said it will pay $102 a share for Cubist, 37 percent above the Lexington, Massachussetts, company's closing share price of $74.36 on Friday. Cubist shares were up 35 percent at $100.70 on Monday.
Open interest in Cubist call options, which convey the right to buy the stock at a fixed price in the future, jumped by 25 percent between Dec. 1 and Dec. 5 to 13,864 contracts, according to Trade Alert data. That ranks among the largest increases in open interest over a five-day period this year for Cubist calls.
On average, Cubist options are not very actively traded, but trading volume was unusually heavy on Thursday, said Fred Ruffy, options strategist at WhatsTrading.com.
Ruffy also noted an increase in Cubist's implied volatility, a gauge of the risk of large moves in a stock and a key component to options pricing. Implied volatility jumped to 51.49 percent on Thursday from 43.15 percent on Wednesday, according to Livevol Inc data.
One call strike in particular saw a big increase in activity on Thursday. Around 1,000 Cubist calls at the $85 strike and set to expire on Jan. 17 were bought for between $1.25 to $1.50, according to Livevol Inc data.
Ahead of those trades on Thursday afternoon, the January 85 calls had fewer than 300 contracts of open interest, according to Reuters data. By the end of the day that had risen to more than 1,300.
Since going on the board in October 2013, the average volume of January 85 calls had been about 14 contracts a day, and their largest daily total before Thursday had been 175 contracts. Thursday's volume was more than 45 standard deviations above the norm.
"To expect the stock to move past $85 and be willing to pay over a $1 for it with about a month and a half to go suggests that they were expecting some kind of major catalyst," said optionMonster.com lead analyst David Russell.
Until Monday, the high for Cubist shares was $82.12, set in February this year.
With the stock soaring to a record above $100 on the merger news, the January 85 calls are now quoted at about $16, making for a huge profit on the trades, Russell said.
One other possible catalyst for the shares involves a possible resolution of a lawsuit surrounding a generic challenge to Cubist’s lead drug, Cubicin, by Hospira Inc. A settlement or verdict in the case has been seen coming in December or January and analysts tracking the stock had expected that to have big implications for Cubist shares.
Cubist did not respond immediately to a request for comment on the unusual options trading activity.
Editing by Peter Galloway