NEW YORK, Oct 30 (Reuters) - Traders who took unusually bullish positions in Dynegy Inc's options, weeks before the company's shares soared on word of a deal with Vistra Energy Corp, stand to make outsized profits, Reuters data showed.
Dynegy shares jumped as much as 14 percent to a one-year high of $12.84 on Monday after Vistra offered to buy Dynegy in an all-stock deal worth $1.74 billion.
Dynegy shares have gained as much as 39 percent over the last four trading sessions, boosted by a Wall Street Journal report on Wednesday that Vistra Energy was in talks to buy Dynegy.
But Dynegy options drew bullish activity weeks before the report of the merger talks.
"Players in the options market were aggressively positioning for a move higher ahead of the merger news. I think it will raise eyebrows," said Fred Ruffy, analyst at New York-based options analytics firm Trade Alert.
On October 5, Dynegy options volume jumped to 38,000 contracts or about twenty times its average daily volume, making it the busiest day for the options in at least two years, according to Trade Alert data.
The bump in trading volume was driven by aggressive trades in December and January contracts.
In one transaction a trader paid roughly $555,000 to buy 6,000 of Dynegy January call spreads. The trade involved selling Dynegy calls with a $14 strike price and buying $10 strike calls.
Buying call options gives the buyer the right to purchase the underlying security at a fixed price in the future, while selling calls creates the obligation to sell the underlying security at the fixed price.
The spreads in question had the potential for maximum gains if Dynegy shares were to rally 47.5 percent or more, to $14 or higher, through the January 19 expiration, according to Trade Alert data.
With the shares rising in recent days, the value of the spread has more than doubled. On paper, the trader stands to make a $675,000 profit, going by the last trading price of the relevant contracts, according to Thomson Reuters data.
Utilities companies have been on traders' radar for merger and acquisition activity, with a number of companies, including Calpine Corp and Sempra Energy involved in deals.
Options activity has been known to spike before the public announcement of deals, and the U.S. Securities and Exchange Commission has in the past announced enforcement action for alleged insider trading violations involving options.
The SEC did not immediately respond to a request for comment. (Reporting by Saqib Iqbal Ahmed; Editing by Daniel Bases and Andrew Hay)