Mike Khouw Sees Trouble For Tiffany's LVMH merger

On CNBC's "Options Action," Mike Khouw spoke about a potential merger between LVMH and Tiffany & Co. TIF.

He said risk arbitragers are very big participants in options markets and by watching their activity we can get some tells on what are they thinking about the deal. When they bet that the deal is going through, they buy the stock and sell calls at the target price. In this case the target price is $135.

The activity earlier this week didn't look like that at all, said Khouw. The stock is not trading close to the deal price and options traders are buying $110 strike puts, $100 strike puts and $90 strike puts and selling $120 calls. Khouw explained that these traders are either hedging their long bets or betting that the deal won't happen.

On Friday, options traders were buying the $110 puts again and selling the $130 calls, said Khouw.