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European investors turn to options to spot next M&A targets

* 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 in Europe hits a 6-year high, a number of investors are turning to the derivatives market for signals to spot the next big takeover targets.

Call options, or bets that a price will rise, offer a cheaper way to take a punt on a possible takeover target than buying the underlying stock, making them a favoured instruments for investors looking to place a speculative M&A bet.

With deal activity involving a European target at its busiest since 2008 according to Thomson Reuters data, derivative desks are screening for stocks where demand for calls is strong to find out where the market expects the next big deal to happen.

"When you have (options) showing that something is happening and the stock is at a very low level, it makes a lot of sense to buy an 'M&A call'," said Delphine Leblond-Limpalaer, equity derivatives specialist at Societe Generale. "We're currently in an M&A wave, so you just want to play it."

If call options become more expensive than puts - an unusual occurrence given that demand for downside protection is normally stronger than that for upside exposure - this suggests the market is betting on a very positive event, such as an M&A bid.

Similarly, if short-dated options cost more than longer-dated ones, this may mean investors are expecting an imminent bout of volatility, typical of a major event such as a bid, followed by a quieter period after the deal is announced.

"For a typical M&A prey the short term (options) would get bid and the long end would fall or not move much," Kokou Agbo-Bloua, head of equity and derivative strategy for Europe at BNP Paribas.

"That's because in most M&A situations ... there's a first gap move and then, once the deal is done, there's a period where volatility just goes lower and nothing happens."

Societe Generale has been screening for stocks where three-month options are more expensive than 12-month ones and the "skew", or difference in implied volatility, between a put with a strike price 10 percent below the current level and a call 10 percent above that level is below 1.5 points.

Soc Gen highlights retailers Sainsbury, Marks & Spencer, and Metro AG, telecoms groups Vodafone and Deutsche Telekom as European blue-chip stocks ticking both boxes.

Drugs firm AstraZeneca, which has been the object of a takeover offer from U.S. rival Pfizer, and French industrial group Alstom, which received a General Electric bid for its energy business, also presented those characteristics even before news of the bids hit the headlines.

(Reporting by Francesco Canepa and Blaise Robinson, editing by Louise Heavens)