Microsoft bid for Yahoo an options bonanza for some

CHICAGO (Reuters) - Some lucky options traders hit the jackpot on Friday with Yahoo Inc call options rocketing into the money after software giant Microsoft Corp unveiled a surprise $44.6 billion takeover bid.

The news fed a frenzy of options trading in Yahoo on Friday as roughly 634,000 call options and 241,000 put options changed hands, a combined volume eight times its usual daily level, according to market research firm Trade Alert.

Microsoft Corp offered to pay $31 a share in cash and stock for the iconic Web portal and search engine on Friday, the biggest Internet transaction since the Time Warner-AOL merger.

Yahoo closed up $9.20 a share on Friday at $28.38, while Microsoft finished $2.15 lower at $30.45.

An equity call option allows an investor to buy the company shares at a given price and time, while a put option does the opposite and conveys the right to sell the underlying shares.

Traders and analysts said options volumes in Yahoo had been extremely active this week due to Yahoo's earnings on Tuesday, making it harder to gauge any suspicious trades ahead of the takeover bid. A spokesman for the U.S. Securities and Exchange Commission said it had no comment on Yahoo options trading.

Yahoo options volume surged, notably on the call side, before and after its fourth-quarter earnings report issued after Tuesday's Wall Street close. Speculators often buy front-month options ahead of earnings and then close out the bets after the results are reported.

"But in this case, we saw unusual buying of March $20 calls ahead of the results and those investors held those positions even as Yahoo shares fell some 12 percent after it reported its results on Tuesday afternoon," said Jon Najarian, a founder of Web information site optionmonster.com in Chicago.

"There were obviously some folks that have been very richly rewarded by buying those March $20 calls."

With Yahoo shares trading at above $20 on Tuesday, Najarian noted the March $20 calls traded more than 7,000 contracts compared with prior contracts outstanding for that strike of just 1,900 contracts.

These calls fetched premiums of around $1.80 to $2.00 on contract on Tuesday and closed at $8.70 on Friday, a tidy windfall for those investors who held onto those calls.

"Did the earnings give insiders cover because they knew it would impossible to determine? Hard to say," Najarian added.

Earnings tend to cloud the picture because there is natural growth of open interest as participants build positions in anticipation of a surprise stock move, said Henry Schwartz, president of Trade Alert in New York.

Since mid-January, Yahoo February $20 and $22.50 calls have been the most active contracts, with more than 133,000 $22.50 calls and 110,000 $20 calls traded, and the open interest of these strikes grew a total of 55,000 contracts, but it's possible much of this volume was earnings focused, Schwartz said.

In all, 246,138 calls vs 112,093 puts changed hands in Yahoo on Tuesday, outpacing its average daily volume of 110,852 contracts, according to the Options Clearing Corp.

Active trading persisted on Wednesday, even after Yahoo's results sparked a slide in Yahoo shares as 225,163 calls compared with 62,764 puts traded, OCC data showed.

"Some of the call volume was probably closing trades as some players scrambled to close out bullish positions as the stock suffered a post-earnings sell-off," said Frederic Ruffy, analyst at options education firm Optionetics based in California. "However, the fact that call volume exceeded puts by a margin of almost four-to-one is unusual and noteworthy."

On the other hand, Rebecca Engmann Darst, equity options analyst at Interactive Brokers Group, said option activity in Yahoo did not suggest imminent expectations of a deal.

"There did not appear to be anything in the option activity on Monday, Tuesday and Wednesday that would suggest a deal was forthcoming," she said.

Heading into Yahoo earnings, most traders were defensive by selling calls and buying puts. "Prior to today's news, the consensus was that Yahoo would continue to struggle without sweeping change in its management or organization."

(Reporting by Doris Frankel; Editing by Andre Grenon)