But why are they then legal to sell? It almost seems like someone wants to be able to sell them, but when they lose the bet they want to revert it. Free money if you're on the correct side.
It’s less obvious with stocks because there’s a pretty streamlined system for taking delivery of the stock ownership but with physical goods or real estate sometimes actually changing ownership triggers a lot of regulatory or tax or process things.
For example, with real estate if you actually buy it you’ll need at minimum to get insurance to cover if any trespassers or workers get injured on the property. Lots of paperwork to transfer the title/deed, and you might be on the hook to help sort out future title / deed / survey errors. But if you never own it you save the headache of all these things.
For buying commodities you need a safe, regulated warehouse/tank to store it, handle all the ohysical logistics, etc.
By buying and selling the right to purchase the things you can delay the actual purchase until you find someone who can and wants to actually deal with the ownership of the thing.
The seller is basically stealing money from a "sucker", until they suddenly aren't. No value in allowing those kind if bets, then. Where the seller either wins or claim fraud. Very one sided.
Let's take a boring case -- that $10 stock is NOT going to $1000 tomorrow, they're not finding a cure for cancer, etc. So 99.9999999/100, if you sold someone the option for $.01, it's going to expire worthless tomorrow. You have 1M shares, you sell the call options for 1M * $.01 = $10,000.
You let some other people place bets on a thing that might (but probably won't) happen, and you get $10,000 just for owning the stock. It's like an interest payment (with some risk).
If the thing DOES happen, you are taking a risk that you'll have to sell your stock for slightly less than if you'd held it, so you're giving up some potential gains.
But in the long run, this is all priced out and balances out (in theory, in an efficient market). You get $10,000 in "interest" but are taking the risk that you might lose some upside in a black swan event, and the buyers are paying a nominal amount to take a bet on the other side. They might have spent $10k in order to possibly make a $billion -- those are risks that some people price and want to take (like a lottery).
While a hedged out of money option is commonplace. various payoffs you can create with options is mind boggling.
If this was e.g. 1 million different buyers of 1 option each instead of 1 buyer of 1 million options this would be a non-story.
Things are legal until there is a law or ruling that makes them illegal
What's illegal is to use insider info to make the decision to do the trade. Did the entity making this trade use insider info? We don't know. If they did not, nothing wrong with the trade.
Now, the circumstances are such that this reeks of insider info. Nobody sane would have done that trade otherwise. So hopefully the SEC will investigate fully. If it turns out the trader really did not have any connection to either of these companies and had no knowledge of the acquisition and simply made the luckiest bet of their life.. then that's fine.
But my point is that there were people on the other side more than willing to take that person's money. If "no one sane" would do that trade, why let the other side be able to profit of it until suddenly it wasn't free money? Why shouldn't the other side carry any risk?
What else would you propose?
Designing an algorithm that prevents people from offering or taking bad trades would require a reliable crystal ball. Solving the halting problem sounds easier.