Questions raised on Schering-Plough calls before deal

CHICAGO, March 9 (Reuters) - The unusual buying of call options in Schering-Plough Corp SGP.N placed days before its pending acquisition deal with Merck & Co Inc (MRK.N) have some options players asking if the news was leaked in advance.

Some lucky option players appeared to have reaped a windfall with Schering-Plough call options rocketing after Merck on Monday announced a proposed $41.1 billion takeover of the drugmaker.

The transaction offers a premium of 34 percent for Schering-Plough shareholders based on Friday's closing price of $17.63. Its shares rose 14.18 percent to $20.13 on Monday.

Schering-Plough's average daily turnover of call options was 7,249 contracts per day in February, according to the Options Clearing Corp (OCC).

But a burst of activity in the stock's call options last Tuesday and again on Friday may be too much of a coincidence to overlook and prompted some option traders to ask if inside word of the pending deal reached some investors.

"Our examination of the data suggests a high degree of likelihood that someone did indeed place what I will be politically correct and call nicely timed trades," said Jon Najarian, a founder of Web information site optionmonster.com, in an email to Reuters.

"I leave it to the regulators to term them insider trades, but our work suggests that moniker may be more accurate."

The U.S. Securities and Exchange Commission declined to comment on the unusual activity in Schering-Plough's call options, which give buying rights to the stock's shares.

OCC data showed on Tuesday that more than 14,000 calls traded in Schering-Plough, or nearly double the daily average.

Even more telling was last Friday, the last trading day before Merck's bid for Schering-Plough, where more than 46,000 SGP calls changed hands, six times the norm.

"To see a spike in call volume on the day before a pending deal is announced, this suggests a possible leak that a deal was in the works," said Henry Schwartz, president of analytics trading firm Trade Alert based in New York.

Some investors on Friday zoomed in on Schering-Plough's call options granting them the right to buy what is now a $20.13 stock for $17.50 a share.

The March $17.50 calls, which closed on Friday at $1.15, hit a high of $3.70 this morning, a 221 percent return on investment in just one day, said Najarian. They ended at $2.65 a contract, up 130 percent from Friday.

Similarly, the April $17.50 SGP calls closed at $2.80, up 80.7 percent from Friday's close, Reuters data showed.

Najarian also noted "the biggest longshot payoffs and most likely insider trades" were at the March and April $20 SGP call strikes, which also posted inflated premiums on Monday.

To be sure, Schering-Plough has been the subject of takeover speculation for years, given the partnership to jointly develop and market drugs for cholesterol management between the two drugmakers.

But some analysts said the circumstances surrounding the call activity may reflect speculative bullish bets.

"There was a pick up in the call options in Schering-Plough on Friday on speculation that they could be acquired," said William Lefkowitz, options strategist at brokerage firm vFinance Investments.

"This was not the first time that the company was rumored to be an acquisition target, but this time the result was an actual takeover," he said. (Reporting by Doris Frankel; Editing by Bernard Orr)