King Pharma options up on takeover talk

CHICAGO (Reuters) - King Pharmaceuticals Inc KG.N option volume surged on Friday fueled by speculation that the drug maker may be acquired, according to several options analysts.

Pfizer Inc (PFE.N), the world's biggest drug maker, was touted as a possible suitor, according to one analyst.

"There are rumors that Pfizer might be very interested in acquiring King Pharmaceuticals," said William Lefkowitz, options strategist at brokerage firm vFinance Investments in New York.

Both Pfizer and King were not immediately available for comment.

King's top two drugs are Altace, a treatment for high blood pressure and the muscle relaxer Skelaxin.

The company's shares rose 2.42 percent, or 25 cents, to finish at $10.59 on the New York Stock Exchange.

The stock of the Bristol, Tennessee-based drug maker has fallen from its year high of $22.10 in early May. In September a U.S. federal appeals court ruled that King's patent for Altace was invalid, opening the door to competition from cheaper generic versions.

"King Pharma call volume and volatility are up on renewed buyout chatter," said Paul Foster, options strategist at Web information site theflyonthewall.com in Chicago.

Option participants said traders reacted to the takeover talk which surfaced in the morning by turning to King calls, giving investors the right to buy King shares at a set price and time.

According to market research firm Trade Alert, 9,917 calls compared with 339 puts changed hands in King on Friday, which was nine times its normal options volume.

This morning's takeover speculation appeared to be driving heavy call activity in King. This was accompanied by a 30 percent rise in option implied volatility suggesting that options traders were expecting share price movement, said Rebecca Engmann Darst, equity options analyst at Interactive Brokers Group.

Particularly notable were the calls, giving investors the right to buy King shares at $12.50 within the next few weeks.

These December $12.50 calls were bought at around 25 cents a piece and in order to break even on this trade, King shares would have to go up 18 percent to about $12.75, Darst said.

But late in the session, Darst said that buying interest in King calls subsided.

Its overall option implied volatility, which measures the expected magnitude of share movement conveyed by option prices, also came off its high of 60.7 percent to 59.7 percent.

"It appeared that buyers were focused on the December and January $12.50 calls earlier today and did not seek higher call strikes given that King stock has traded as high as $22.10 this past year," she said.

She also noted that there was virtually no move to sell puts, which allow investors the right to sell King stock at a given price and time.

"Sometimes when a stock is in the thick of takeover rumors one would see call buying at strikes higher than the stock price and put selling at lower strikes," Darst said.

"So it was not clear if this rumor has any more legs given the drop-off in option activity."

(Reporting by Doris Frankel. Additional reporting by Jessica Hall; editing by Carol Bishopric)