R.F. Lafferty & Co. Inc.
TWELVE OPTION MYSTERIES
Did 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. So what exactly are examiners looking for? 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 that is the focus of this study.
THE BEGINNING
October 15, 1996, 1:15 EST
On this day, one of my clients had a position in Conrail and I was keeping an eye on it. At midday the stock was about unchanged, just over $60. I happened to take a look at its options and here a big surprise awaited me. Thousands of calls were trading, far more than average volume and unexpectedly they were up, and up substantially. The October 60s was up about a point from their prior close of $1.25 to $2.25, with the stock not up at all. Very unusual. What was this all about? The answer came the next day as CSX Corp made a buyout offer for Conrail and the stock skyrocketed. Now all of this made sense. Of course, the call buyers were willing to aggressively bid up the calls-they knew what was coming. I was left wondering how many such things were going on and had gone on that I wasn’t aware of. After all, I had just stumbled on this situation. Wouldn’t a way to detect such activity have great value? Was anyone doing this? I searched through option data providers and option advisory services, but could not find any that offered such a program. Following this episode from time to time I came across situations where puts or calls acted out of sync with their underlying stock and in an impressive percentage of the cases, the option direction correctly predicted what the stock would do and do soon. In the ensuing years I had discussions with several option software programmers who assured me that formulas could be developed to detect such anomalies but none of them came through. Eventually, after numerous attempts, I was able to construct the necessary formulas on my own. Here we present 12 actual examples of what our trading alert system was able to detect. They have been selected as dramatic examples, not meant to imply similar results are to be expected from each signal.
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-Jay Shartsis- Director of Option Trading jshartsis@rflafferty.com 800 221 8514 Supportive documentation for these examples will be provided upon request.