Altera deal story far from over, options data suggests

Discussions on a takeover by Intel Corp (INTC.O) of smaller chip maker Altera Corp (ALTR.O) may have ended for now, but activity in Altera's options suggests traders are still hoping for a deal.

Altera shares, which jumped as much as 30 percent to $45 on March 27 on reports of a potential deal, have held most of those gains and the company's options continue to imply a huge move for the shares in the near term. The shares were trading up 2 percent at $43.29 on Nasdaq on Wednesday.

"I think there is a sense that, although talks with Intel stalled, the story isn't over," said Fred Ruffy, options strategist at WhatsTrading.com.

Late last month, Intel was reported to be in talks to buy Altera in a deal that could have topped $10 billion, but the talks ended, according to recent reports.

The possibility of a deal has spurred activity in Altera's options with average daily volume jumping to more than 50,000 contracts, up from less than 3,500 a day before the reports of the talks.

The 30-day implied volatility for Altera, a gauge of the risk of a large move in the shares, is at 67.2 percent and higher than 99 percent of the readings over the last 52 weeks, according to options analytics firm Trade Alert.

This is not unusual when a takeover rumor is present without an actual bid, said Ophir Gottlieb, chief executive of Los Angeles-based Capital Market Laboratories.

Big shareholders pushing Altera to pursue a deal might also be part of the reason the options market does not see this story as over. Several of Altera's shareholders, including Cadian Capital Management and TIG Advisors, have urged the company to resume talks with Intel, according to a recent Bloomberg report.

Altera and Intel did not immediately respond to requests for comment.

Altera's upcoming earnings report on April 23 may also be on the minds of options traders as volatility expectations tend to spike ahead of earnings reports.

But in Altera's case, the expectation for a big move in the near term is about twice as high as it has been ahead of its other recent reports.

"While it’s hard to discern how much of the implied volatility increase is on takeover speculation and how much is because of the known event, I do expect it to still stay in the high end of the range even after earnings," Brian Overby, senior options analyst at online brokerage TradeKing in Charlotte, North Carolina, said.

Open interest in Altera's calls, usually used for placing bullish bets on a stock, has risen to more than 310,000 contracts, up from 81,000 on May 26, according to Trade Alert.

Calls betting on the shares rising above $45, $47 and $55 have attracted a lot of attention and now represent some of the biggest blocks of open interest in Altera's options expiring in April. Despite reports of the talks stalling, calls have outnumbered puts by a ratio of more than 3-to-1 on heavy volume.

Still, since implied volatility only gives a sense of the risk of a big move in the stock and not the direction of the move, the elevated risk in share price could also be read to mean that Altera shares could go lower sharply if a deal does not materialize, said Gottlieb.