$AVP calls soar on deal news

Avon Products returned exponential gains on bullish option positions after reports of buyout talks today.

On April 23, Investitute’s market scanners found that 8,500 Weekly $3 calls expiring on May 31 were bought at the same second for $0.10 and $0.15 with shares at $2.63. This was clearly a new position, as open interest in the strike was a mere 24 contracts before that session began. Investitute co-founder Jon Najarian cited the unusual activity at that time on CNBC’s “Halftime Report.”

Those calls traded up to $0.71 today, more than 5 times their average purchase price. The stock surged 39.16% in the same time frame, a huge move but nowhere near that of its options on a relative basis.

Long calls lock in the price where investors can buy a stock, letting them position for a rally at limited cost with the potential for significant leverage. They carry less risk than owning shares because the most that can be lost is the price of the options no matter how far the stock might fall.

AVP jumped 9.06% to $3.49 today. This morning Brazil’s Natura Cosmeticos confirmed that it is in advanced negotiations to acquire Avon in an all-stock deal valued more than $2B.