Traders make bullish bets on United Technologies-Raytheon deal despite activist pushback

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Options traders bet on United Tech as Raytheon merger hits resistance

Some traders are playing offense in the defense space.

There's been a spike in bullish bets on United Technologies and Raytheon in light of the aerospace and defense giants' impending all-stock deal, with above-average call activity seen in both stocks, Mike Khouw, co-founder and chief strategist at Optimize Advisors, said Wednesday on CNBC's "Options Action."

The action is occurring despite some resistance from prominent United Technologies shareholder and activist investor Bill Ackman, who on Sunday sent a letter to that company's CEO casting the merger as ill-advised.

"It's common to see above-average activity in the options of stocks that are involved in deal activity," Khouw said, noting that the most active strike calls in United Technologies' stock were the June $124 strikes, which cost about $2.40 each.

With those calls, buyers were "making a bet that [the stock]'s going to be up at least 2% by the end of next week," Khouw said. "But, presumably, they're betting on further gains than that since they are obviously looking to see some profits."

United Technologies shares were up by less than 1% in midafternoon trading Thursday, hovering around $124.50 a share.

Khouw also noticed some traders becoming what he called "premium sellers," or those who saw their options contracts appreciate in value enough to sell them off to other bullish traders and turn a profit.

"That is also common in deal stocks like this," Khouw said. "That could still be pointing towards bets that this merger would actually take place, because they might be betting that the combined entity would have lower volatility than the individual stocks did before they merged."

The combined entity will also put up a challenge to others in the aerospace and defense industry like General Electric, said Tim Seymour, founder and chief investment officer of Seymour Asset management and a regular trader on CNBC's "Fast Money."

"This is going to be a formidable company to any competitor out there. I just think, though, that the overall defense sector has traded very poorly relative to itself," he said in the same "Options Action" segment. "Some of this really is the overall weighting of the indices, and I just think there's people that are running out of these trades. These stocks got expensive."

Others, like BKCM founder and CEO Brian Kelly, also a regular "Fast Money" trader, weren't as cautious.

"I think there's going to be a chance to buy these," he said Wednesday on "Options Action." "If you look at the political part of the analysis here, what are they not going to cut in the budget? Defense. So, you want to be there. So, at some point, there's going to be a chance to buy them."

Shares of Raytheon were down less than 1% midafternoon Thursday.

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