On March 20th, 2016 Sherwin Williams (SHW) announced an $11.3B deal for Valspar (VAL) at $113/share cash with Valspar having closed at $83.83. VAL was a name consistently highlighted to clients with unusual options activity.

Key Takeaways:

• Multiple Days of ITM and OTM Call Buying with the Stock Weak and Strong and Steady Growth in Call Open Interest
• Aggressive Purchases (Buyer Paying Offer or Through the Offer on Wide Bid-Ask Spreads)
• Suitable Target – Citi Note on 1-5-16 “We have called VAL a takeout candidate for the past few years so we may sound like a broken record. But we still think VAL remains an attractive target for another large coatings company given the ongoing consolidation of the global coatings industry. Admittedly the company isn’t cheap, currently trading at nearly ~11.5x forward EBITDA. We think Sherwin Williams or Berkshire Hathaway (owner of Benjamin Moore) could be possible acquirers in our view, given that both companies have strong contractor customer base, but are not big in big boxes.”
• Equity also shows relative strength to market, positive price-action, multiple above 20 day avg. volume up days

It started on 12-3-2015 when 1,600 April 2016 $90 calls were bought to open at $2.05 to $2.10 with shares trading $83. A teaching note, VAL shares hit as low as $73 in early January 2016, and 99% of the time one can get into these smart money positions at a much better entry, even though this call buyer will make nearly $3.7M, the value of the position earlier this year was basically worthless.

On 1-8-2016 a trader bought 2,500 April 2016 $90 calls at $1.45 to open, rolling out of January $90 calls that were sold for $0.25. Those two trades account for 4,400 of the current 5,041 contracts in open interest. VAL was a name, however, that saw unusual call buying on nearly a daily basis, a name with fairly wide bid-ask spreads that saw traders consistently paying the offer and even through the offer to grab OTM contracts.

The April $85 calls have around 3,500 contracts in open interest, a trader on 2-1-16 bought 1,000 at $1.50, and on 2-18-16 a trader bought 800 contracts at $2.

The April $80 calls have 5,439 contracts in open interest, starting on 2-5-16 when a trader bought 700 contracts at $3.80 to $4, added 1,400 contracts the next trading day on 2-8 at $3.60 to $3.90, then another 1,000 contracts the next day at $4 to $4.70, and 900 more on 2-10 at $4.60 to $5.20. On 2-12 1,300 more were bought at $3.50 to $3.70, steady accumulation accounting for 5,400 contracts.

A massive trade as recent as last week on 3-17-16 bought 6,000 July $80 calls at $7.75, a $4.65M trade that stands to profit $15.15M.