NEW YORK (Reuters) – Recent options activity on shares of Mirant Corp (MIR.N) suggests traders were anticipating a substantial move in the stock prior to the announcement that Mirant would acquire a rival power company.

Mirant jumped 18.9 percent to $12.76 on Monday, one day after it agreed to take over RRI Energy Inc (RRI.N).

The merger will create one of the largest U.S. independent power producers during what has been a rough time for energy companies as recent signs of economic recovery have not resulted in a commensurate recovery in power markets.

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RRI Energy shares were up nearly 13.9 percent to $4.50.

Both stocks rallied on Friday ahead of the deal’s announcement, with Mirant gaining 3.9 percent and RRI rising 5.3 percent.

Options market activity shows investors were expecting something to happen with Mirant, even if it was unclear what, as options investors took new bets on big moves in Mirant while RRI Energy didn’t see major options play.

“We have been seeing unusual volume for weeks” on Mirant, said Jon Najarian, a founder of web information site optionMonster.com. “The rumor has been out there for a long time.”

The most active options on the underlying stock were the April $15 calls and June $15 calls while the put interest was very low, Najarian said.

Some options traders seemed to be betting on higher volatility in the shares.

“Options activity on this stock has been especially active since last week, but they (the bets) are for a more longer dated options, and the merger news is one catalyst that certainly doesn’t hurt,” said Jud Pyle, chief investment strategist at Options News Network, a division of option marketing firm Peak6 Investment in Chicago.

Pyle said heavy buying action occurred in Mirant options on Wednesday with a block of roughly 5,000 January 2011 $10 straddles traded.

The total premium was about $3.25 per straddle, a bet on volatility that requires the investor to buy a call and a put option at the same strike price and expiration date. The buyer is looking for significant movement in either direction in the stock. The implied volatility on Mirant shot up to 42 percent compared to the stock’s 30-day historical volatility of 30 percent.

A total of 5,369 January 2011 $10 calls and 5,122 puts at the same strike were traded, according to option analytics firm Trade Alert.

Pyle said investors who bought these straddles will make money if the shares drop below $6.75 or rally higher than $13.25 prior to the January 2011 options expiration, suggesting they are banking on volatility to kick in. (Editing by Padraic Cassidy and Leslie Adler)

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