Since we're on the sidelines in trading metals and energy (more on that later), going into the close we picked up the Ceradyne December 55 puts. In recent weeks we've seen too many reports on various services (we subscribe to many because you are only as good as your information) about takeover "chatter" which pushes shares up one day, then down the next. It seems that for every 10 rumors, only a few actually pan out. We're not betting on a collapse in CRDN, just a give back of the rumor gains.
While we have nothing against Ceradyne, and actually find reasons to like the stock and note some fairly positive analyst coverage, the action in the December 60 calls today is a good case in point in what a lousy a game playing these takeover rumors can be. When we first heard the rumor this morning of takeover "chatter" from theflyonthewall we threw the options chain on the screen and saw the big activity in the December60 calls. They were bid at 30c, offer 40c with a theoretical value of 28c, which was a turnoff from the get go. As the day progressed the stock moved higher and the option climbed as well, especially the offer, so that the Dec60 call traded as high as 75c today. But even with a gain of more than $2 in the stock, the Dec60 call finished with the bid back at a miserable, but an appropraite 35c. Yes, with the underlying stock $2 higher at $56 the theoretical value of a call with a strike price of $60, or $4 out of the money is just 31c.
So, there is someone out there sitting on an options loss of more than 50% tonight even though the underlying stock jumped by more than $2! And where the underlying stock is concerned, there will no doubt be new longs tomorrow morning wondering why nothing more is happening and will be selling their shares when there isn't fresh takeover news. It happens time and time again.