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Options Action: Pharmaceutical Company Sees Heavy Activity

Friday, 3 Apr 2009 | 2:13 PM ET

Cubist Pharmaceuticals is up more than 12 percent today with heavy options activity amid rumors that the company will be bought by Swiss drug giant Novartis.

According to the chatter, which is more specific than other rumors, Novartis is to announce a deal Monday to purchase Cubist for $1.6 billion, or $26 a share. This one meets our "three-V" evaluation criteria of volume, volatility, and valuation:

  • Volume: More than 19,200 Cubist calls traded in the first 30 minutes of today's session alone, a ridiculously high number right out of the gate against only 118 puts. By comparison, normal full-session volume for the month of March was just 700 Cubist calls per day, according to OptionMonster's real-time tracking systems.
  • Volatility: Implied volatility for Cubist has popped from a median of 57 percent to 115 percent in the April at-the-money strike.
  • Valuation: Cubist has been falling steadily since the beginning of the year, when its shares were trading well over $25. The stock hit its 52-week low of $13.81 on March 5 but has been climbing since then.

The valuation makes us believe that Cubist could indeed be in play. Novartis, meanwhile, is down more than 2 percent in afternoon trading.

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Jon 'DRJ' Najarian is a professional investor, CNBC contributor, and cofounder of OptionMonster.com.

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