BUZZ-Rio Tinto: M&A talk catches market heavily short

** A market heavily short Rio Tinto (Xetra: 855018 - news) was caught off-guard on Glencore (Xetra: A1JAGV - news) 's reported interest, resulting in a more than 3 standard deviation move in the Aussie miner's US-listed ADRs. Chart: http://link.reuters.com/syb23w

** Going into Tuesday's reported approach, elevated levels of implied volatility indicate steady demand for puts. Chart: http://link.reuters.com/jyb23w

** Rio put/call ratio on NYSE Liffe-traded options at its highest in about 8 yrs. Such positioning created a short gamma position for dealers on the sudden rebound, with hedging flows leading to the explosive move higher in the futures and cash shares. Chart: http://link.reuters.com/myb23w

** Large, liquid mining stocks such as Rio offer an equity market proxy to play slide in iron ore prices towards 5-yr lows.

** Bernstein calculates for every dollar fall in the price of iron ore, Rio's assets lose $1.5 bln in value.

** Glencore approach, while rejected, likely puts a floor under oversold Rio shares, one trader at US bank says, as pressure now on Rio's board to extract value for shareholders. (RM (LSE: RM.L - news) : vikram.subhedar.thomsonreuters.com@reuters.net; RM: eric.burroughs.thomsonreuters.com@reuters.net)