Forest Labs $2.55 Million Options Bet Doubles on Takeover Deal

Feb 18, 2014 10:22 am ET

Feb. 18 (Bloomberg) -- A block of 5,000 options betting on a 28 percent jump in Forest Laboratories Inc.’s shares that cost $2.55 million to buy last week more than doubled in value to $6 million today after Actavis Plc agreed to buy the drugmaker.

The calls, which expire in January 2016, traded on Feb. 14 for $5.10 each, according to data compiled by Bloomberg. Only 11 of the contracts were outstanding on Feb. 13. Forest rallied 30 percent to $92.65 at 9:45 a.m. in New York today.

Actavis, the world’s second-largest generic-drug maker by market value, agreed to pay $25 billion to take over Forest. Billionaire investor Carl Icahn, who is Forest’s second-largest shareholder, had said that the maker of treatments for Alzheimer and blood pressure made a good takeover candidate for a larger pharmaceutical company.

“The options market had a telling trade on Friday,” Lillian Seidman, an options strategist at Miller Tabak & Co. in New York, said in an interview. “There had been speculation of a deal in this name for several weeks prior, and the options were quite pricey.”

Bullish options with an exercise price 10 percent higher than Forest’s share price cost 1.22 points more than puts hedging against a decline of at least 10 percent at the end of last week, according to one-month implied volatility data compiled by Bloomberg. That was near the all-time high reached in December.

The volume of calls in Forest jumped to a one-month high of 6,678 on Feb. 14, compared with 1,275 puts, data compiled by Bloomberg show. Among the six most-traded options that day, five were bullish.

Forest February $85 calls and February $75 calls had the biggest jump in price among all U.S. options today, data compiled by Bloomberg show.

--Editors: Will Hadfield, Srinivasan Sivabalan