Although Terra Industries has long been an acquisition target, some traders appear to have placed well-timed bullish bets in Terra options just a week before a takeover bid was announced.
Norway's Yara on Monday agreed to buy fertilizer maker Terra Industries for $4.1 billion, boosting its presence in the U.S. Corn Belt region.
Terra attracted heavy call option trading on Feb. 9, in what may be another instance of a buyout preceded by questionable trading in the options market.
The flurry of activity has prompted at least one option trader to question whether the news had reached some investors ahead of time.
Jon Najarian, a founder of Web information site optionMonster.com, noted unusually heavy action in Terra bullish call options prior to the announcement.
"This activity suggests to us and our models that someone had advanced knowledge of this takeover bid by Yara International. If I were the regulators, I would examine who bought calls and puts one week ago and see whether it was just good timing or something more," he said.
Yara's offer values Terra at $41.10 per share and represents a premium of 23.6 percent compared with Friday's closing price.
Investors often turn to equity call options, which allow them the right to buy the company's shares at a fixed price within a specified time period, to speculate on potential share price appreciation.
A put conveys the right to sell the stock.
According to the Options Clearing, a total of 26,116 calls and 5,335 puts traded in Terra for the week ending Feb. 12.
Call trading was noteworthy on Feb. 9 when about 19,000 call contracts versus 400 puts traded, more than three times the recent average daily call volume, according to option analytics firm Trade Alert.
"During the week preceding this bid, our systems showed trades in Terra puts married with stock were also suspicious," Najarian said.
"Traders also targeted February and March $35, $37 and $40 calls during that week and on Feb. 9."
Joe Kunkle, a founder of OptionsHawk.com, highlighted the unusual call activity on his Web site.
"On Feb. 9, I found it rather odd with shares at $32 that a buyer would come in for 4,000 February $37 calls at (a premium of) 12 cents, 15.6 percent out-of-the-money, and only a week and half from expiring," Kunkle said.
A trade of that size opened so far out-of-the-money this close to Feb. 19 expiration seemed "fishy", he said.
As Terra shares rose $7.44 to $40.69 on Tuesday, the February $37 calls closed at $3.70 per contract.
For the trader who purchased those 4,000 calls at 12 cents apiece, the profit was potentially $1.4 million.
It can be hard to pin down whether unusual trading patterns in a target company's options stems from insider information because it could also reflect speculative bets.
To be sure, some analysts and investors have for a while speculated that Yara could come in with a bid for Terra, as both companies have a strong focus on nitrogen-based fertilizers like ammonia, urea and UAN.
Also, Canadian fertilizer maker Agrium, one of Terra's largest rivals, reported a bullish 2010 forecast on Feb. 9, which drove its shares up more than 5 percent on the day.
This could have led investors to buy call options in Terra with an eye on Terra's upcoming results on Feb 18.
Trade Alert President Henry Schwartz also noted the March $37/$40 call spread was sold for a net of 25 cents per spread and traded 4,335 times on Feb. 9 — a trade that would have lost money based on Tuesday's stock price and option premiums.
"At first glance the February call purchase looks suspicious. However, the March call spread was sold shortly thereafter and is likely to be by the same initiator," he said.
"Taken together this does not look like these trades would benefit from the deal."
Officials for Terra declined comment.
The U.S. Securities and Exchange Commission, which looks into unusual share and options activity, declined to comment.
U.S. securities regulators are probing unusual activity in Airgas call options before a $5.1 billion offer for the industrial gas company was announced, a person familiar with the probe said on Feb. 10.
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