Speculation Medtronic will modify its offer for Covidien as sentiment worsens toward tax inversions is fueling demand for bearish options.

Covidien contracts betting on declines in the Dublin-based hospital products company are among the most expensive in the Standard and Poor’s 500 Index.

Medtronic, the Minneapolis-based device maker, said in June it will pay about $42.9 billion for Covidien in a tactic partly aimed at freeing $14 billion of overseas cash. Now investors are concerned the deal's terms will change after Walgreen last week turned away from a tax inversion strategy in its acquisition of Zug, Switzerland-based drugstore chain Alliance Boots GmbH.

Traders trying to profit from takeovers lost more than $20 billion on August 6th as 21st Century Fox dropped its bid for Time Warner, Sprint Corp. ended its pursuit of T-Mobile US Inc. and Walgreen shares slumped.

“After Walgreen, there is more risk around inversions,” Jim Strugger, a derivatives strategist at Stamford, Connecticut- based MKM Holdings LLC, said via phone. “Also, after what happened with Time Warner and Sprint, you put those two elements together and there’s likely to be more demand to add protection in deals.”

Gary Ellis, Medtronic’s chief financial officer, said in June that while the company plans to buy Covidien with or without the inversion, it would reassess the decision if the laws changed.

Covidien shares closed at $87.26 yesterday, almost 10 per cent below the current value of Medtronic’s $96.12 offer. The current spread implies a 63 per cent chance the deal will be completed, according to a formula calculated by Bloomberg that tracks the target’s price relative to the offer. Fernando Vivanco, a spokesman for Medtronic, declined to comment, as did Peter Lucht, a spokesman for Covidien.

“Our expectation is that the transaction will close as planned,” Lucht said in an e-mail.

Bloomberg