The takeover rumors are back, declares David Nassar in The MarketWatch Options Trader.
He says, "One sign of normalcy has returned to the market: takeover rumors that spur wild option trading."
"The rumor market has returned strongly. There have been the following rumors this week, all accompanied by sharp upward moves in the stock and heavy call buying.
According to him, there is a rumored takeover of Heinz (NYSE: HNZ) by Campbell's (NYSE: CPB) as well as Safeway (NYSE: SWY) by Kroger (NYSE: KR).
There is a also rumored takeover of Red Hat (NYSE: RHT) by Oracle (NASDAQ: ORCL) and a rumored buyout of Stryker (NYSE SYK) by Baxter (NYSE: BAX).
"None of these rumors has panned out (yet). That's typically the case, and so it doesn't usually pay to buy these stocks or their call options on these moves.However, some of them do pan out," Nassar says.
He adds, "The strongest move and one that wasn't denied by the company's CEO was a rumored takeover of Allergan (NYSE: AGN) by Glaxo SmithKline (NYSE: GSK) Allergan."
"The breakout in AGN came at the 43 level, and it ran all the way to 49 on the first day. Speculative accounts can try to buy AGN calls on pullbacks by the underlying stock."
Another takeover rumor concerns Illumina (NASDAQ: ILMN), he adds. Supposedly, according to rumor, Johnson & Johnson (NYSE: JNJ) is interested in acquiring Illumina.
Nassar says, "There have false takeover rumors in Illumina in the past, so we would not base a call purchase strictly on that. In addition, ILMN has been trending upwards since last November, and it recently broke out over resistance at 37. That was the day that the takeover rumor surfaced."
"Since then, it has pulled back and tested the 37 level and moved higher. That is positive, because it is often the case that takeover rumor gains are very short-lived.
According to him, stock volume patterns are positive, and call option volume has been heavy. "There is support at 36-37 on the chart. We recommend buying ILMN April 35 calls at a price of 4.10 or less,"
he notes.
