Market Report: Massive options bet prompts Rolls-Royce surge

Someone out there thinks the stock has further to go before the end of March. Volume on the options exchanges was very high, with Euronext.Liffe, the London derivatives exchange, confirming that one trade of 15,000 contracts went through on the March 500p calls. At a price of 2.75p per contract, that is a £412,500 gamble that could be worthless in seven weeks if the shares do not hit 502.75p before the end of March. Each contract gives the owner the option to buy 1,000 shares at 500p each, meaning that the owner of those contracts will make £150,000 for every penny Rolls-Royce shares rise above 502.75p.

Traders watch the options markets carefully - it is where big punts can be taken without having to actually buy the shares. Whoever bought these contracts now has exposure to 15 million Rolls-Royce shares that would have cost £66m had shares been bought rather than options.

Rolls is due to report full-year figures on Thursday and while most analysts expect the company to report good numbers, few expect the share price to rally another 13.5 per cent before the end of March. Some traders think the business has turned around well enough to attract some bid interest. One said: "The risks to investors in the airline industry are well known but this is about after-sale contracts and those are very lucrative. I see no reason why Rolls should not attract plenty of interest from potential buyers, most likely from the private-equity world, and investors rarely buy option contracts of that size unless there is something going on."

Rumours of corporate activity were also behind a good day for Marks & Spencer and ITV. Volume in M&S was huge, with 24 million shares changing hands, against a daily average for the last year of 10 million. According to market rumours, a current market capitalisation of £8.2bn would mean a potential bidder for the business would have to find the best part of £11bn to buy the group that Stuart Rose has turned around. Philip Green's pockets are probably deep enough but he may find competition if a bidding war begins.

ITV was buoyed by a note from the broker Credit Suisse saying the private-equity industry may look at the company again. The buyout house Apax Partners reportedly tabled a bid for the company with Time Warner in July 2005, and the Swiss broker believes there is a strong chance of another bid emerging at about 140p. Shares in ITV rallied 2.5p to close at 112.5p on heavy volume of 36 million shares.

It was an up and down day for shares in the London Stock Exchange. At one point it traded as high as 780p, but late sellers saw it end the day at 768p, up 5p. A forward price-to-earnings ration of 25.8 times is too rich for some analysts, and the German broker WestLB advised clients to reduce their exposure to the stock and lock away some profits. In a note to clients, it said: "In terms of M&A, we see less likelihood of any bidder being successful. Macquarie is having trouble finding any acceptance for its offer and we do not think that they have the resources to justify a bid above the current share price level."

Shares in the oil exploration and production industry have, with one or two exceptions, been star performers over the past year. Max Petroleum listed in London only in October and its shares have seen a fourfold increase. A sell-off was bound to happen at some point and it came yesterday, as traders reported that investors were selling out of Max to cover losses on Regal Petroleum. Regal dropped by 69 per cent on Tuesday after losing a court case in Ukraine.

In a research note, the broker Canaccord Adams also recommended selling Max, noting that the company's market capitalisation had reached almost $1bn despite "having no production, no booked reserves and only outline drilling plans". The shares plummeted 21.25p to 113.75p, on heavy volume of 11 million shares. Meanwhile, Regal dropped another 6.25p to 34.5p.

The AIM-listed Empire Interactive led the way among smaller stocks, rising 1.62p to 6.87p, a 30.8 per cent increase. The company said it had received several approaches, thought to be from its UK rival SCI Entertainment and two US computer games companies. Traders said a fair price for the company would be 10p, although as founders Ian Higgins and Simon Jeffrey own 64 per cent of the stock, it may be difficult for buyers to take a position.