Option strategy for SLM

Even as Sallie Mae settled one cause of speculation, option traders found something else on which to bet.

Background: On Friday, word that SLM Corp., better known as Sallie Mae, was in talks to be acquired drove trading in the stock and call options on the student lender. The company said yesterday it will be bought for $60 a share. Its stock rose $8.29, or 18%, to $55.05 in New York Stock Exchange Composite trading.

That is still about 8% below the deal price and reflects uncertainties about how quickly the acquisition will close and what regulatory hoops the buyers might have to jump through. If each of those questions is answered favorably over the coming weeks and months, the stock should rise to approach $60.

But some option traders saw an opportunity yesterday to try for a quick profit by speculating on what might happen to that so-called spread between the stock price and deal price, said Michael Schwartz, chief options strategist at Oppenheimer & Co.

How it works:
They did this by trading call options conveying the right to buy SLM shares for $55, in this case the April 55 calls, which expire in just four days.

Buying side: Buyers of these calls are expecting Sallie Mae shares to rise substantially past $55 in the next four sessions. They might be hoping for a rival bid to emerge, or just that once they have taken the time to think about it, stock traders will substantially adjust their view on how quickly the deal can close, Mr. Schwartz said.

Selling side: Much of the trading was also the work of sellers, who collect the option's price -- 50 cents by the end of the session -- and hope the stock won't remain above $55. Mr. Schwartz noted that either trade is fairly risky and likely the work of professional traders.

He also wondered if the call buyers were just redeploying a small portion of profits made in existing positions to take a shot that the stock could continue to rise. About 6,200 of the April 55 calls traded yesterday. They ended the session at 50 cents, up 45 cents.