Option volume spike as Santander Brasil bid emerges

Shares in Banco Santander Brasil surged following an offer from the board at Grupo Santander to make an offer for all shares the group doesn’t already own, representing about 25% of its share capital. Banco Santander announced ahead of trading that it would offer a 20% premium to the prior closing price forcing investors to lift the share price to $6.93 from Monday’s closing price of $5.78. Since reaching target, its shares have come off to $6.66.

However, as shares eased, call option buyers have stepped up to take on around 13,000 calls expiring in September at the 6.0 strike. Ahead of today’s trading there were only 10,200 calls held among investors, who know appear to be loading up on more, presumably with the view that deal completion will leave its shares trading higher than the $6.75 implied price of the option.

To put the activity in perspective, the 6.0 strike call options make up 97% of overall option activity on Tuesday while overall volume represents 86.8% of all options open interest on Banco Santander Brasil. Finally, the decline in implied volatility of just 17% following news of the offer still leaves expected price movement relatively high at 29%. One might have expected a larger move if investors expect little to stand in the way of a speedy tie-up in this case.  

 
 

Chart shows call option buyers add to positions as shares fail to maintain purchase price.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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