Some Lehman option traders wary of takeover prospects

By Doris Frankel

CHICAGO (Reuters) - Some options players appear skeptical that Korea Development Bank will pursue a takeover of Lehman Brothers LEH.N, taking advantage of the stock's jump on Friday to place a cheap bet that the gains won't hold.

Shares of Lehman Brothers Holdings Inc ended up 5 percent after state-run Korea Development Bank KDB.UL said the U.S. investment bank was a possible acquisition target.

At one point, the stock rose more than 15 percent before finishing at $14.41 on the New York Stock Exchange.

"The response from option traders has been interesting, especially in the October options where a trader appears to have played against the easy-fix rumors," said Rebecca Engmann Darst, equity options analyst at Interactive Brokers Group.

"They may be betting on a low ball takeover, they may betting on no takeover or they may be betting on more bad news," Darst said.

Although there are relatively more call options than puts traded in Lehman, Darst noted a number of strategic option plays suggested fear of continuing declines.

In all, about 155,000 calls vs. 112,000 puts traded in Lehman, double the normal volume, according to option analytics firm Trade Alert.

An equity call allows investors to buy the company's shares at a given price and time, while a put conveys the right to sell the stock.

In the October contract, a trader earlier in the day appeared to have bought a long 8,870-lot put spread involving the $2.50 and $5 strikes for a 25-cent debit, she said. The trade would be profitable if Lehman shares moved between $2.50 and $4.75 but not below $2.50.

"Given that Lehman October options are pricing in only about a 3 percent chance of its shares dropping below $5 by October 17 expiration, there is virtually no chance of a bust of below $2.50 a share," she said. "It's clear that this trader is playing this position as a cheap bearish bet."

In another October play, one or more traders may have sold $27 strike calls at 22 cents a contract to fund a long collar trade involving strikes of $12.50 and $20 at 33 cents.

A collar is a defensive strategy that involves selling a call on an existing long stock position and buying a protective put at the same time.

In this case, the trader would have bought the put at the $12.50 strike and sold the call at the $20 strike. Even if Lehman shares move above $20 between now and mid-October, the trader would not be able to participate in that gain because the call was sold and caps upside share movement.

"This too would seem to suggest a very muted outlook for Lehman shares, even if a bid is forthcoming," Darst said.

(Reporting by Doris Frankel)