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Airgas upside calls surge ahead of Air Products bid

*Airgas calls surge ahead of Airgas hostile takeover

*April $50, $55 call strikes stand out on Thursday

CHICAGO, Feb 5 (Reuters) - Large, well-timed bets in Airgas Inc ARG.N call options the day before a rival industrial gas supplier launched a takeover bid raised eyebrows on Friday.

Air Products and Chemicals Inc APD.N launched an unsolicited $60-a-share cash bid for rival Airgas Inc ARG.N, whose shares rose above that mark, indicating that investors expect a higher bid.

The $5.1 billion bid represents a 38 percent premium over Airgas’s Thursday closing price. Shares have since risen as much as 44 percent to $62.63. For details, see [ID:nSGE61406A].

Heavier-than-usual activity on Thursday in a few select upside call trades that expire in April has raised questions as to whether the news reached some investors ahead of time. Airgas shares gained 38 percent to $60.10 Friday.

“This unusual action suggests that Friday’s deal was not a surprise to everyone,” said Trade Alert President Henry Schwartz. “Yesterday’s volume stands out because of the high concentration in out-of-the-money calls, where 66 percent of those were bought on the offer.”

According to Trade Alert data, just over 2,000 contracts in the April $55 call strikes traded on Thursday, and 1,820 of those were opening positions. Almost all of these contracts were bought at a premium of 10 cents per contract.

Equity call options grant the investor the right to buy the company’s shares at a fixed price within a specified time period. When investors speculate on a possible takeover, they typically buy out-of-the-money calls because they can put the least amount of money at risk and realize the highest return if the merger does occur, causing the stock to soar.

This activity stood out. Airgas is typically a thinly traded name, averaging 482 contracts per day. But on Thursday, 4,570 calls and 257 puts traded on the day, nearly 10 times recent average daily volume, Trade Alert data show.

The U.S. Securities and Exchange Commission, which looks into unusual share and options activity, declined to comment.

Option participants said the burst in call volume was prevalent in the April $50 and $55 call strikes, which convey the right to buy the shares at $50 and $55 apiece as shares fell below $44.

“The fact that someone was buying more than 25 percent out-of-the money calls on a stock that recently fell more than 10 percent after posting earnings makes me think that someone had some information that Air Products was looking into this acquisition,” said Joe Kunkle, a founder of Web site

Airgas on Jan. 28 posted a lower-than-expected fiscal third-quarter profit. For details, see [nN28179779].

To be sure, the circumstances surrounding the call buying may also reflect speculative bets or plain luck.

The Airgas board already rejected two similar proposals. The first bid was all stock, while the second included stock and cash.

Still, option traders said the surge in Airgas call volume on the trading day before Air Products announced its unsolicited bid may be too much of a coincidence to overlook.

The April $50 call strike also attracted volume of 1,300 contracts priced at 35 cents per contract, and 1,166 turned out to be fresh positions, according to Trade Alert.

The premium paid for the $55 strike was nearly $20,000 and $45,000 was spent on the $50 calls. Based on Friday’s market, the $55 calls were priced at $6.75 and the $50 calls at around $11 with total paper profits at well over $2 million, Schwartz said.

“Given this action came one day prior to Air Products hostile bid for Airgas, this is the type of trading activity that could suggest insider information,” said Jud Pyle, chief investment strategist at Options News Network, a division of options market-making firm PEAK6 Investments LP in Chicago. (Reporting by Doris Frankel; Editing by Kenneth Barry)