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* Option prices used to identify targets as M&A wave spreads
* Derivative desks screen for hefty demand for call options
* Soc Gen highlights Sainsbury, M&S, Deutsche Telekom,Vodafone
By Francesco Canepa and Blaise Robinson
LONDON/PARIS, May 12 (Reuters) - As corporate deal-making inEurope hits a 6-year high, a number of investors are turning tothe derivatives market for signals to spot the next big takeovertargets.
Call options, or bets that a price will rise, offer acheaper way to take a punt on a possible takeover target thanbuying the underlying stock, making them a favoured instrumentsfor investors looking to place a speculative M&A bet.
With deal activity involving a European target at itsbusiest since 2008 according to Thomson Reuters data, derivativedesks are screening for stocks where demand for calls is strongto find out where the market expects the next big deal tohappen.
"When you have (options) showing that something is happeningand the stock is at a very low level, it makes a lot of sense tobuy an 'M&A call'," said Delphine Leblond-Limpalaer, equityderivatives specialist at Societe Generale. "We're currently inan M&A wave, so you just want to play it."
If call options become more expensive than puts - an unusualoccurrence given that demand for downside protection is normallystronger than that for upside exposure - this suggests themarket is betting on a very positive event, such as an M&A bid.
Similarly, if short-dated options cost more thanlonger-dated ones, this may mean investors are expecting animminent bout of volatility, typical of a major event such as abid, followed by a quieter period after the deal is announced.
"For a typical M&A prey the short term (options) would getbid and the long end would fall or not move much," KokouAgbo-Bloua, head of equity and derivative strategy for Europe atBNP Paribas.
"That's because in most M&A situations ... there's a firstgap move and then, once the deal is done, there's a period wherevolatility just goes lower and nothing happens."
Societe Generale has been screening for stocks wherethree-month options are more expensive than 12-month ones andthe "skew", or difference in implied volatility, between a putwith a strike price 10 percent below the current level and acall 10 percent above that level is below 1.5 points.
Soc Gen highlights retailers Sainsbury, Marks &Spencer, and Metro AG, telecoms groupsVodafone and Deutsche Telekom as Europeanblue-chip stocks ticking both boxes.
Drugs firm AstraZeneca, which has been the object ofa takeover offer from U.S. rival Pfizer, and Frenchindustrial group Alstom, which received a GeneralElectric bid for its energy business, also presentedthose characteristics even before news of the bids hit theheadlines. (Reporting by Francesco Canepa and Blaise Robinson, editing byLouise Heavens)
