$MCHP call prices surge fivefold

Option traders posted big profits in Microchip Technology today after company announced that it is acquiring Microsemi.

On Feb. 20, Investitute’s market scanners identified the purchase of 5,300 March $90 calls for $0.89 to $0.95 with shares at $85.46. These were clearly new positions, as open interest in the strike was a mere 71 contracts before the activity appeared.

Those calls traded as high as $4.52 this morning, 5 times their original purchase price. The stock rose 8.9% in the same time frame, showing how options can far outperform their underlying shares.

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.

MCHP was up 2.55% to $91.29 today. The chip maker said yesterday afternoon that it has agreed to buy Microsemi for $8.3 billion.