12:30pm (EST)

Human Genome Sciences (HGSI, $21.84, up $2.62) is up again today on more takeover chatter.  The stock made a move from $17 to $19 yesterday and I have been watching the option pits to see how serious this news is.

I have profiled and discussed takeover stocks and trades in the past and sometimes you can have luck with them and sometimes they are just a bunch of hot air.  Here is a blog I did back on November 18th, 2008 when Anheuser-Busch was bought out by InBev.  The article has some good points and it is an interesting read.  (QUOTES are from that day):

This Bud Is For Its Shareholders

Nah, Nah, Nah, Nah…Hey, Hey…Goodbye!

It’s in the books. Shareholders of Anheuser-Busch (BUD, $66.33, down $0.51) approved the $52 billion sale of its beer business to Belgium-based InBev today. The two companies will create the world’s largest brewer.

The was the last step needed to form the company that will be now be known as Anheuser-Busch InBev. Yeah, its sucks to lose an American icon but the shareholders got a great deal. Not to mention the beer list the company touts. Bud/ Bud Light, Stella Artois and Beck’s. Gee, I wonder if they will create a variety pack.

I’ve been mentioning this deal for months and we actually went long on some Anheuser-Busch option calls when the rumor was floating around. I also mentioned in late October when the stock was in the upper $50’s that you should consider a stock trade because the deal was expected to close by the end of the year. Although the merger is subject to regulatory approval in the U.S., Britain and China, the buyout offer is $70 a share.

The gains from making that trade were about 20% but the key was that it was a safe trade in a volatile market. As option traders, yeah, we like to trade options but there are times where you have a situation like this one and you have to buy the stock instead of trading options. True, it would have tied up a lot more capital – buying 100 shares would have cost $5,700 – but the return was pretty much guaranteed with the buyout priced at $70. When the stock was at $57 you should have realized that there was still $13 to go which gives you a 23% return.

The stock may have been down today but eventually it will get to $69-$70 a share. Even at today’s closing price there is still 8% to go. It’s what is known as arbitrage on Wall Street, a risk-free profit. Although I always prefer options over stocks this is one time where the stock was a better bet.” (END)

Now, back to HGSI.  When the news broke yesterday that GlaxoSmithKline is preparing a bid for the company I went straight to the option pits.  Glaxo wants to gain full control of the promising lupus drug Benlysta and the two companies worked together to develop the drug and two other products.

There was huge volume on the call options yesterday and that is the case again today.  The first thing to remember though is that these options are commanding a premium right now because of the news.  There is a buyout number of $30 a share being tossed around and at current levels that would be another 50% move for the stock.

The September 25 calls (HQIIE, $1.40, up $0.65) closed at 75 cents yesterday and I knew they would get another pop this morning if rumors persisted.  However, I didn’t want to talk about a trade this morning because I didn’t want you buying anything at the open.

A lot of traders get excited on this kind of news and it would have been nice to get you in yesterday but I had to do more research.  Now, for those investors that rushed in this morning to buy these call options, they paid up to $1.90 at the open as the stock ran up to a high of $22.78.

If you would have bought 10 contracts you would be down $500 already.  There has been over 8,000 contracts traded so far and the September 30 calls (HQIIF, $0.50, up $0.40) have traded 2,500 contracts but that is what the expected buyout price is going to be.

The October 25 calls (HQIJE, $2.10, up $0.85) have traded nearly 4,000 contracts and have hit a high of $2.75.

If you buy the September 25’s at $1.40 and the buyout comes before September 18th for $30 then these call options should trade between $4-$5.  Same thing for the October calls.

It is a risky trade and one that I’m not getting in.  I will profile the September 25’s for the track record so we will see what happens.

Other notes….

International Business Machines (IBM, $118.92, up $0.09) has traded $120 for 3 straight trading sessions heading into today.  We made some monster profits with IBM back in July when the stock made a huge move after earnings.  I profiled three trades that returned 245%, 258% and 335%.  Those trades were perfect for the move IBM made.

Since we’ve been out of those trades I have been saying to watch IBM for a move to over $120.  Well, here we are.  Keep watching IBM and this development but I’m a little hesitant to go long right now.

Important Update 1:00PM (EST): The HGSI September 25 calls (HQIIE, $0.70, down $0.05) as the stock has dipped back down to $20.  I would pull the trigger on 1/2 a trade if you are buying the rumor.  If you can get a pop back to $1.50, close the trade.

Rick@MomentumOptionsTrading.com