Cephalon Options Burn Call Sellers as Shares Soar on Buyout

Cephalon Options Burn Call Sellers as Shares Soar on Buyout
Cephalon Inc.'s Provigil, used to treat excessive sleepiness caused by narcolepsy, is arranged for photograph at a pharmacy in New York. Photographer: JB Reed/Bloomberg

Sellers of Cephalon Inc.’s bullish options yesterday, before Valeant Pharmaceuticals International Inc.’s $73-a-share bid for the maker of sleep and pain drugs sent the contracts soaring, lost on their trades.

Yesterday’s most-active options were August calls to buy the stock at $70. They traded 3,799 times with 44 percent of transactions on the bid price -- which indicates that sellers initiated the trades -- compared with 33 percent at the ask price. While those buyers saw a 10-fold one-day paper profit, sellers now must pay $7.20 to the buyers of those calls, which closed at 70 cents yesterday. Cephalon calls had the three biggest percentage gains among U.S. options contracts today as the stock jumped 28 percent to close at $75.44.

“While call volume was heavy yesterday, most of it appears to have been initiated by sellers who will realize significant losses,” Henry Schwartz, president of Trade Alert LLC, a New York-based provider of options-market data and analytics, wrote in a note. “Most active were the August $70 calls, with several thousand sold by a customer in the 50-55 cent range.”

Valeant made its cash offer of about $5.7 billion, or $73 a share, public last night after its private approaches were rejected, the company said. The bid for Frazer, Pennsylvania-based Cephalon presents a 24 percent premium to yesterday’s closing price of $58.75. If successful, the acquisition would be the largest hostile takeover in the industry since Sanofi-Aventis SA bid for Genzyme Corp. last year.

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