CVS Caremark (NYSE: CVS) announced the acquisition Longs Drug Stores (NYSE: LDG) for $71.50 per share in cash. LDG closed at $54.04.

Pershing Square filed a 13D on August 5 indicating an ownership of 8.8% of LDG. LDG was expected to report Q2 EPS in mid-August.

LDG option volume was heavy over the last seven trading days. LDG August 55 straddle closed at $2.55, September 55 straddle was at $7.30. LDG September option implied volatility of 51 is above its 26-week average of 43 according to Track Data, suggesting larger price movement.

CVS closed at $38.05. Jefferies says: "We believe CVS/Caremark's unique competitive position; substantial revenue/EPS upside opportunity, and still modest valuation should lead to significant equity appreciation."

CVS September option implied volatility of 28 is near its 26-week average according to Track Data, suggesting non-directional price movement.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com