The next trading day, Monday, November 20th, Phelps Dodge opened at $122.90 on a takeover bid from Freeport/McMoran (FCX). The reason for the anomalous option movement and pricing was now clear.

    We call this case history Option Mystery 11. (Eleven others are discussed in the section titled 12 Option Mysteries.) The common denominator is that they are all revealed by option anomalies.

    The questions immediately arise: can we detect these rare events? Can we interpret them to make smarter trades. Yes; and yes.

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How The Project Began...

    We have been working on SOA for more than a decade. The first “option mystery” occurred on October 15, 1996. Conrail was trading at a flat price, but thousands of calls were trading, far more than average volume and unexpectedly they were up, and up substantially. Very unusual. What’s going on? The answer came the next day as CSX Corp made a buyout offer for Conrail and the stock skyrocketed.

     Following this episode, from time to time we came across similar 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.

    Any trader would wonder: how many such things were going on? Wouldn’t a way to detect such activity have great value? Was anyone doing this? We searched through option data providers and option advisory services, but could not find any that offered such analysis.

    In the ensuing years we had discussions with several option software programmers who assured us that formulas could be developed to detect such anomalies; but none of them came through. Eventually, after numerous attempts, we were able to construct the necessary formulas on our own.

    Finally, we can proudly offer a service that is a genuine breakthrough. As a Lafferty client, you will receive email alerts, and analysis, when the system detects an anomaly.

    For more information about SOA, call Robert McKenna at 800-221-8514; email is Bob@optiontraders.com. Or go to the Open An Account page.

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     This research was conducted by Jay Shartsis, Director of Option Trading at Lafferty & Co. The resulting Alerts Program is named Shartsis Option Alerts or SOA.

Bottom line:

6.4 million options trade every day. Only a handful of these trades are peculiar. The anomalous trades can be fleeting and hard to detect. They can also be very valuable because they possibly reveal the hand of the proverbial “smart money.” That’s the essence of Shartsis Option Alerts.

Phelps Dodge (PD)

CBOE trading floor

    Our new service grew from a 10-year study of option behavior. Occasionally, a stock and its underlying options will act out of sync with each other. This happens for good reason. For example, on November 17, ‘06,  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. Very unusual to see these calls up substantially with the stock down on the day. (And no news). 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.

Read all 12 Option Mysteries (click here). 

Read about Jay Shartsis (click here).