June 7, 2011 / 9:25 PM / 7 years ago

Unusual Temple-Inland options bet seen before takeover bid

*Temple-Inland January 2012 $25/$30 call spread stands out

*TI attracts put selling on takeover bid

*Option volume in TI surges on Tuesday

CHICAGO, June 7 (Reuters) - A large bet in Temple-Inland Inc TIN.N call options almost two weeks before a rival made an unsolicited bid for the packaging company raised eyebrows on Tuesday.

International Paper Co (IP.N) late on Monday offered $3.3 billion for Temple-Inland.

In the options market, one select upside call trade expiring in January 2012 stood out. The trade took place on May 25 and positions for a “huge rally in Temple-Inland shares,” said Interactive Brokers Group option analyst Caitlin Duffy.

The bullish investor paid a net premium of $1.10 per contract for a 6,425-lot January 2012 $25/$30 TIN call spread when Temple-Inland shares were trading at $22.81, Duffy said.

The spread was tied to the sale of 150,000 shares trading at $22.40, a common method to minimize initial market impact, said Trade Alert President Henry Schwartz.

The circumstances surrounding the trade may merely reflect speculative bets. But the subsequent announcement of a bid by I-P raised questions about the timing of the trade.

“The trade does look suspicious based on timing and the unusual large size,” Schwartz said. “But the use of the January options suggests the buyer did not realize that a deal would be announced so soon.”

    Duffy noted that call open interest at these strikes indicates the trader was still holding the position as of early Tuesday.

    “The run-up in the shares arrived far sooner than predicted by the spread,” Duffy said. “The trade was well-timed but I do not have any evidence that it was suspect.”

    Temple-Inland has rejected the $30.60 per-share cash bid, a 46 percent premium to its stock’s closing price on Monday, saying it “grossly undervalues” its assets and raises antitrust concerns. [ID:nN06277927].

    The stock closed up 40.36 percent at $29.49 on the New York Stock Exchange on Tuesday.

    Total premium paid for the spread was just over $700,000 at the time of the trade and the maximum value for the spread is $3.2 million if the shares move above $30 by January expiration, Schwartz said.

    But this investor has already seen the spread value triple to near a premium of $3.40, a paper gain of $1.4 million for the options part of the trade, he said.

    The U.S. Securities and Exchange Commission declined to comment on Temple-Inland’s option activity.

    Option traders concentrated on the nearer-term contracts. Duffy said there was frenzied put selling on Tuesday morning at the June $29 strike, where it appeared at least 6,500 puts were sold at an average premium of 17 cents each.

    Traders short those puts keep the full amount of premium received on the transaction as long as Temple-Inland shares stay above $29 until June expiration. About 11,496 puts changed hands at that strike against zero open positions on Tuesday.

    Tuesday’s option volume was nearly 47 times greater than average daily levels, as about 23,000 puts and 28,000 calls traded, according to Trade Alert. (Reporting by Doris Frankel; Editing by Dan Grebler)

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