* Option prices used to identify targets as M&A wave spreads
* Derivative desks screen for hefty demand for call options
* Soc Gen highlights Sainsbury, M&S, Deutsche Telekom,
By Francesco Canepa and Blaise Robinson
LONDON/PARIS, May 12 As corporate deal-making in
Europe hits a 6-year high, a number of investors are turning to
the derivatives market for signals to spot the next big takeover
Call options, or bets that a price will rise, offer a
cheaper way to take a punt on a possible takeover target than
buying the underlying stock, making them a favoured instruments
for investors looking to place a speculative M&A bet.
With deal activity involving a European target at its
busiest since 2008 according to Thomson Reuters data, derivative
desks are screening for stocks where demand for calls is strong
to find out where the market expects the next big deal to
"When you have (options) showing that something is happening
and the stock is at a very low level, it makes a lot of sense to
buy an 'M&A call'," said Delphine Leblond-Limpalaer, equity
derivatives specialist at Societe Generale. "We're currently in
an M&A wave, so you just want to play it."
If call options become more expensive than puts - an unusual
occurrence given that demand for downside protection is normally
stronger than that for upside exposure - this suggests the
market is betting on a very positive event, such as an M&A bid.
Similarly, if short-dated options cost more than
longer-dated ones, this may mean investors are expecting an
imminent bout of volatility, typical of a major event such as a
bid, followed by a quieter period after the deal is announced.
"For a typical M&A prey the short term (options) would get
bid and the long end would fall or not move much," Kokou
Agbo-Bloua, head of equity and derivative strategy for Europe at
"That's because in most M&A situations ... there's a first
gap move and then, once the deal is done, there's a period where
volatility just goes lower and nothing happens."
Societe Generale has been screening for stocks where
three-month options are more expensive than 12-month ones and
the "skew", or difference in implied volatility, between a put
with a strike price 10 percent below the current level and a
call 10 percent above that level is below 1.5 points.
Soc Gen highlights retailers Sainsbury, Marks &
Spencer, and Metro AG, telecoms groups
Vodafone and Deutsche Telekom as European
blue-chip stocks ticking both boxes.
Drugs firm AstraZeneca, which has been the object of
a takeover offer from U.S. rival Pfizer, and French
industrial group Alstom, which received a General
Electric bid for its energy business, also presented
those characteristics even before news of the bids hit the
(Reporting by Francesco Canepa and Blaise Robinson, editing by