Quiksilver (NYSE:ZQK) Options Volume Spikes on Takeover Rumors

Quiksilver, Inc. ZQK was an unlikely name to come across our radar in Thursday's trading. The apparel company, which caters to the young surfing, snowboarding, and skateboarding “dudes,” saw volume of close to eight million shares trade. This compares to average daily volume of less than one million. The shares were also markedly higher on the day, up more than 20%.

Why all the excitement? The rumor mill, which was churning with speculation that ZQK could be acquired by PPR, the French retail group responsible for such brands as Gucci, Yves Saint Laurent, and Puma. Analysts speculate that the firm could be looking for new business opportunities once it unloads its Conforama furniture unit.

Options activity was also running way above average on the day. Within a half hour of the closing bell, roughly 6,000 options had changed hands, the large majority of which were on the call side. While 6,000 may not seem like much, it is a far cry from average daily option volume. In the third quarter, roughly 150 contracts traded per day in ZQK (on average).

The January and February 6-strike calls – out-of-the-money by roughly 30% as of Wednesday's close – were notably active during Thursday's session. These options saw heavy volume throughout the trading day, across multiple exchanges, in a variety of block sizes. Most of the activity took place off the offer price, suggesting they were likely initiated on the buy side. Elsewhere, the May 6 calls were active and appear to have been sold to open on the bid.

If in fact investors were buying the short-term calls and selling the long-term calls, it could be because the belief is expecting PPR to propose a cash deal. The calls would presumably shoot up on the speculation but the extra premium the longer dated options command today would decrease precipitously. As we have noted here in the past (more than once), the realized volatility of cash is close to zero. Once a buyout price is proposed, implied volatilities tend to drop off precipitously.

The risk to a long call is the premium paid; gains are theoretically unlimited. A short call is exposed to unlimited risk down to zero and the maximum potential profit is the credit collected from the sale.

Photo Credit: Legendary Classic

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