A fire is burning under options of two well-known retailing names: Target and Macy's.
Shares of Target rallied by nearly 5% Friday, while Macy's surged as much as 6%. Options volume tied to both stocks was several times above its daily average.
"Although activity may have peaked for the day, it seems that speculators might not be looking for a buyer for Target as much as they are for an increasing degree of gyrations for the shares," said Andrew Wilkinson, senior analyst at Interactive Brokers Group. "Rumors are percolating that Target may be looking to divest its credit card business."
A buyout of Target is seen as a highly difficult undertaking since the retailer has a market vaule of more than $57 billion.
Target options trading was brisk Friday with call options volume outpacing put options by a margin of 2-to-1.
The Target July 67.5 calls were the most actively traded of the Target options with volume of over 20,000 contracts. The 67.5 calls are known as "in the money calls," which mean the stock is trading above the $67.50 strike price and represent a bet that Target shares will rise further.
Target's vice president of communications, Susan Kahn, returned a call inquiring about the stock activity after the market closed on Friday. She said that Target cannot comment on specific rumors."
However, Kahn added that Target "has been transparent about its credit operations, sharing its strategy and outlook. We have said in the past that Target has no plans to sell the credit card operations".
The demand for Macy's call options was even larger, as call volume in the July contracts outpaced put volume by a margin of nearly 5-to-1.
For a third consecutive Friday, Macy's has been the subject of takeover speculation. Last week, a Goldman Sach research report suggested that Macy's could be acquired for as much as $52 a share. It's seen as an attractive target both because of cash flow and its real estate holdings.
Eddie Lampert, the chairman of Sears Holdings was another name making the rounds of potential acquirers of Macy's, which has a market capitalization of more than $19 billion dollars, Interactive's Wilkinson said.
"The latest chatter today in dealing rooms is that super-investor Eddie Lampert may be looking to tie Macy’s and Sears Holdings together," he said. "That thought spurred options traders to wade in and buy more insurance on a further rise in shares at Macy’s."
A Sears spokeswoman said the company does not comment on market rumors and speculation. Macy's also has declined to comment on the speculation surrounding its stock.
Implied volatility surged 22% in Macy's today to 42%, making Macy’s one of today’s largest volatility climbers.
In the Macy's options chain, the July 45 calls were the most actively traded with volume of more than 10,000. The calls had been sagging to near worthless levels ahead of today's speculation, enabling a one day gain of 200%.
Asked whether the latest speculation is just the usual Friday takeover speculation that turns into nothing come Monday morning, Wilkinson said: "many traders find it hard to resist taking a position in these deal chatter names for fear of missing out on a deal. It's the environment we're in."