What Can We Learn From Options Action In Altera $ALTR?

| April 17, 2015 | 0 Comments

What Can We Learn From Options Action in $ALTR?

As regular readers know, I spend a lot of time discussing large and unusual options trades. Generally speaking, you can gain quite a bit of insight based on what the smart money is doing in options.

But what about options activity in general? Can overall options action also help you glean valuable info?

Let’s take a look at a current scenario and see if we can figure anything out. In this case, we’ll look at the white hot stock Altera $ALTR.

First, here’s the back story…

Chipmaker powerhouse Intel $INTC had been in serious talks to buy Altera in an all-cash deal. A significant premium had been built into the price of $ALTR shares on expectations of the acquisition.

However, news broke recently that Altera management rejected a $54 per share all-cash buyout of the company. In case you’re wondering, that’s a whopping $9 per share over the 52-week high, a 20% premium.

So what does $ALTR options action tell us about the rejected deal?

First off, for a more in-depth look at ALTR, you can check here.

In addition, for a brief take on why Intel was interested in buying Altera, check out this article.

Okay, so back to the action in ALTR…

After the news broke of ALTR’s rejection of the deal, you’d expect the share price to plunge. Except, after an initial selloff, the stock rebounded and is trading higher on the day! In fact, as of this writing, it may even break the previous 52-week high.

In other words, investors not only haven’t panicked, they’ve doubled down on ALTR.

Options action isn’t quite so clear cut. The most volume is in April 45 calls and April 39 puts. However, most of the total April volume is in calls, not puts.

Let’s try to sort this out.

The April 45 strike has traded over 25,000 times, but open interest was about 16,000. So, some options traders were probably exiting their long calls once the news was announced.

Meanwhile, the volume on the April 39 puts is also around 25,000 today. But, open interest was less than 1,000 at the strike, so it’s all opening action. $39 was how far the stock dropped before the big reversal. As such, it could be where downside speculators jumped into the fray.

On the other hand, $39 is also where the 20-day moving average is. That’s a major support line… one which has held so far. In other words, all those 39 puts could be put sellers expecting $ALTR to hold its ground.

This theory is supported by the sheer amount of upside calls trading on ALTR. Overall, it looks like about twice as many calls have traded as puts in April.

Here’s the chart of $ALTR:


As you can see above, the stock shot up when the $INTC acquisition news initially broke. Yet, the rejection of the deal hasn’t caused the stock to plunge back to pre-deal levels.

It looks like $ALTR stock and options traders expect a deal to still go through.

After taking a closer look, it does look like options action is supportive of the stock move higher. Basically, investors don’t believe this deal rejection is going to hold.

There are a few possibilities. First off, $ALTR may be pressured into accepting the deal by shareholders. Or, this is a strong negotiation tactic by Altera management to get an even higher buyout price. Finally, we can’t completely discount the possibility that another buyer steps in and purchases the company.

Regardless, in each of those scenarios, the shareholders win. Judging by options action, the smart money is betting on the upside.

Yours in Profit,

Gordon Lewis
Options Trading Research

Note: Gordon Lewis has been trading options for more than 15 years and he now writes and edits for Optionstradingresearch.com. You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.

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Category: Options Trading

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also one of the key analysts behind the highly successful Options Trading Wire and Advanced Options Adviser. As a market maker on the floor of the CBOE, Gordon analyzed and traded stocks and options across a broad range of market caps and industries including retail, internet, oil, insurance, and telecom. He often traded thousands of options contracts per month… and it’s fair to say, Gordon’s analyzed and invested in some of the most complex and successful options strategies in the world.

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