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Linn Energy LLC (NASDAQ:LINE) is in rally mode today, up more than 10% to $27.32 following the latest development in its plan to buy Berry Petroleum Company (NYSE:BRY). In response, the options pits have grown unusually crowded, particularly on the call side. Roughly 26,000 call options have traded, outpacing the typical intraday volume by a factor of 8. By comparison, fewer than 8,000 put options have crossed the tape. Implied volatility, meanwhile, has jumped 7.1 percentage points, or 13.7%, to 59.4%. This is a far cry from Friday's reading of 48%.
The two largest trades in LINE today appear to be related, as one trader may be prolonging the life of his bullish bet. Symmetrical blocks of 2,000 calls each traded earlier at the September 28 and October 29 strikes. The front-month call crossed between the bid and the ask price at $0.50 per contract, while the October options traded at the ask price of $1.00 apiece.
Given that volume on the latter option exceeds open interest, and implied volatility is up 3.9 percentage points at the strike, it looks as though the trader may be exiting the lower-strike calls in favor of the longer-term, higher-strike position. Further research indicates that the September calls may have been purchased on Sept. 4, when more than 2,000 calls crossed the tape, mostly at the ask price.
The newly minted position is a bet that LINE will be trading north of $30 (the strike price, plus the premium paid) by Oct. 18, when the option expires. Delta for the option has jumped to 0.39 from 0.18, revealing a nearly 2-in-5 chance of the option being in the money by expiration day. Still down more than 22% in 2013, LINE has not traded north of $30 since its July 2 bear gap, which was prompted by news of an inquiry on the part of the U.S. Securities and Exchange Commission (SEC).
Today's strong price action, however, transpired after the SEC issued what may be its last batch of comments regarding the proposed pairing of Linn Energy LLC (NASDAQ:LINE) and Berry Petroleum. Shareholders are scheduled to vote on the deal at the end of the month.
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