Fact And Fiction

Not since US weekly had a double issue has the rumor mill been in such high gear. Of course, the rumors I'm talking about have nothing to do with Brad or Angelina, (apparently Brad is demanding marriage) or the latest turn in the life of some tragic starlet.

Instead, I'm referring to the seemingly never ending chatter of market mergers. NTAP , Express Scripts , Halliburton - all have been the target speculation as options traders buy out-of-the-money calls on hopes of a takeover.

So how do you separate the fact from the fiction, the hype from the reality?

On Friday, we broke it down on "Options Action." At least from an options perspective, there are three things you should look for, according to Stacey Gilbert of Susquehanna.

1) Duration: Are investors buying near-dated calls or are they placing longer-term bets. According to Gilbert, if the activity is limited to shorter-dated contracts, the action could be more myth than merger speculation

2) Following through: Is the options action a one day phenomenon, or is there consistent buying. Case in point: The Genentech March 90/95 call spread. That was active for weeks leading up to the final deal. For many of the names listed above, the action has been limited to one or two days.

3) Common sense: Whenever you hear a name tossed about, ask yourself, 'Does this make sense? Would Exxon really want to buy Halliburton?' This one might be one of the more straightforward questions, but essential nonetheless.

Questions, comments send them to us at: optionsaction@cnbc.com

Contact Options Action

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  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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