Home
Our History
Conspicuous increases in call volume would seem an obvious starting point. Or perhaps options trading at highly inflated prices, way above their “theoretical” value. They may be inflated because “informed” buyers are pushing them up—for good reason. It is indisputable that “smart” money will operate in the option market because of the enormous leverage available. Their actions can leave “footprints”, some not so easy to detect, and those are the focus of this study.
Commissions
You know that regulatory agencies routinely examine option trading that took place in specific stocks before takeovers were announced. They are looking for people who acted on “inside information,” bought calls and reaped big profits when the deals were made public. After the 9/11 tragedy there was an investigation to determine who bought puts on airline stocks before the attack. Those stocks of course dropped sharply and put holders were big winners. So what exactly are examiners looking for?
(1) October 19, 2004
A day or two after the Elliot Spitzer bombshell disintegrated Marsh McLennan (MMC) and brought massive selling into the insurance stocks a strange thing happened. Willis Group (WGR) an insurance broker, had collapsed from $37.80 to $30.50 in just three days but suddenly with the stock trading at $31.44, down 86 cents for the day, the November 35 call jumped from .10 to .70. Was this a mistake? With the stock down, how could the November 35 call be up, and up dramatically? Did the option buyers know about big buy orders for the stock soon to appear? Apparently yes, since the stock immediately started a rally that would take it up to $37.11 in just a few days.
2) November 8, 2004, 11:03 EST
Good news on Elan’s (ELN) important multiple sclerosis drugs sends the shares up $1.42 to $29.30. Strangely however, eleven of its call option series are not validating the move. For example, the November 30 calls are trading at $1.00, down from the prior close of $1.23. They are also trading below their “theoretical” value of $1.22. One strike up, the December 35 calls are trading at 75 cents, down from $1.25 and also below their “theoretical” value of $1.00. The call option weakness proves to be prophetic as ELN implodes to $3 a share in five months.
(3) March 1, 2005
Shares of Kerr McGee (KMG) were trading in the morning at $76.89, down 77 cents on the day. The KMG March 80 calls were, amazingly, trading at $1.72 up from $1.18 at the close. Did those anxious buyers know what they were doing? Two days later it was announced that Carl Icahn had acquired a 4.68% stake in the company and the stock shot up to $83.20.
(4) April 26, 2005, 2:27 EST
On this day a very rare event took place, but one well worth paying attention to. General Motors (GM) shares are trading down 26 cents to $26.49 but its June 30 calls are up 20 cents at 52 cents on the session, volume heavy. Stock down, but calls up, most unusual. The outcome? Kirk Kerkorian’s big position is soon revealed and the stock rockets to $37.70 in three months.
(5) April 27, 2005, 1:06 EST
Amazon (AMZN) is down $1.59 to $31.12 in the session, but five series of its put options are diverging, down on the day, not confirming the move. The May 30 put is trading at 52 cents, down from the prior close of 75 cents. The option is also significantly below its “theoretical” value of 77 cents. The put weakness suggests a bottom is at hand for the stock, and that day proves to be an important low. Amazon rallies to steadily $50 in December.
(6) May 12 2005, 10:32 EST
Mysterious option action takes place in Netflix (NFLX) calls. The stock is trading at $13.02 up only 7 cents but four series of its call options are moving sharply higher. Its May 12.5 call had jumped from 65 cents to $1.00. It is priced way above its “theoretical” value of 67 cents. Its June 12.5 call is up to $1.17 from the prior close of 82 cents, also above its “theoretical” value of $1.00. The stock rises to $30.10 on November 18th. Another example of options leading the stock.
Jay Shartsis, Director of Option Trading
800-221-8514
Supportive documentation for these examples will be provided upon request.
Our daily research is geared to detect similar events. Past performance and events are not indicative to future events or performance. Clients are promptly informed of signals by email or fax. If interested, please contact Mr. Robert McKenna at 800-221-8514 or Bob@optiontraders.com.
12 OPTION MYSTERIES
Marsh McLennan (MMC)
Elan (ELN)
Kerr McGee (KMG)
General Motors (GM)
Amazon (AMZN)
Netflix (NFLX)
Martha Stewart (MSO)
W.R. Grace (GRA)
Rambus (RMBS)
Freeport/McMorgan (FCX)
Phelps Dodge (PD)
Weyerhauser (WY)
(7) August 20, 2005, 10:40 EST
Two new TV shows that will feature Martha Stewart have been announced. This has fueled a round of buying for the shares, pushing it up from $26 to $34.45 in less than three trading sessions. This morning, however, with the stock up $1.11 the MSO September 35 calls are unchanged at $1.40 bid. That is an out of the money call, but tellingly, the MSO September 30 calls, in the money by nearly $5, are also not responding, unchanged at $4.60 bid. This is not “normal” behavior and carries bearish implications. From here the stock will decline to $16.28 in just over two months.
(8) February 15, 2006, 10:19 EST
The defeat of the “asbestos” bill in Congress sent the affected stocks lower on this day. W.R. Grace (GRA) sank 86 cents to $9.08 that morning, but seven of its puts series barely rose as would be “normal”, some actually fell. Further, all were trading below their “theoretical” value, another anomaly. For example, the GRA September 7.5 put was trading at $1.08 down 7 cents from the prior $1.15 close. That was a divergence to the stock decline, a bullish portend. Its “theoretical” value was $1.86, so at $1.15 it was far below. Why? This all suggested that the options (the leveraged instruments) were anticipating a bottom at hand for the stock. It came to pass as the stock hit $18.20 in the week of May 15th, just three months later.
(9) April 26, 2006, 12:00 EST
Rambus (RMBS) jumps $4.52 to $43.12 on news of a favorable patent litigation ruling. Many of its call options however, are inexplicably not rising on this news, as would be expected, but are actually down sharply on the session. For example, the May 45 calls are trading at $2.60 down $2.05 from their prior close of $4.65. They are also substantially below their “theoretical” value of $3.22. The best explanation for these pricing anomalies was the “informed” elements knew that substantial selling was soon to hit the stock and they were selling the options in anticipation. They were most prescient as the stock topped that day and sunk to $10.25 in four months.
(10) October 20, 2006, 12:14 EST
Freeport/McMorgan (FCX) is trading at $56.38, down $1.02 from the previous close. Its January 65 calls however, are quoted at 87 cents, up 23 cents on the session. This is very unusual behavior. Two days later FCX trades as high as $63 when takeover rumors swirl. Conclusion: the call buyers were paying up for good reason. They were apparently aware that significant buying for the shares was shortly to appear.
(11) November 17, 2006, 12:11 EST
Phelps Dodge is trading at $94.23 down 65 cents on the session. Its December 105 calls, however, are quoted at $1.58 up from $1.20 at the prior close. Most unusual to see these calls up and up substantially with the stock down on the day. (There was no news). Why the urgency to pay up for these options? A further clue that something was going on came from the pricing of those options whose theoretical value was only $1.16, so the $1.58 price was a 36% overvaluation-noteworthy indeed. The next trading day, Monday November 20th, Phelps Dodge opened at $122.90, up $27.88 on a takeover bid from Freeport/McMoran (FCX). The reason for the anomalous option movement and pricing was now revealed.
(12) December 14, 2006, 1:32 EST
Weyerhauser (WY) is trading up 2 cents on the session to $66. Inexplicably, its January 70 calls have more than doubled to $1.03 from 50 cents at the prior close. They are also priced far above their “theoretical” value of 68 cents. What is behind this “outside the envelope” action is revealed the next day as the stock skyrockets to $75.50 on possible “restructuring” plans. Those January 70 calls reach $6.50.
Risks: The signals from the “trading alert system” may limit possible gains depending on strategies engaged. The trading alert system may not protect against significant losses and may have adverse tax consequences.
Options involve risk and are not suitable for all investors. Please read and understand Characteristics and Risks of Standardized Options. You must receive the Characteristics and Risks of Standardized Options along with this material.
