Here's the stats on the option board today:
- 8085 calls traded, 6 puts traded
- 95% of those calls were bought on the ask
- Open interest for the entire board was 13k, so very unusual.
- Around noon, we had buys go at the offer (to open) for 3k Nov 5 calls and ~3k Dec 5 calls.
Nice chunk of change for an overnight trade.
"The buyer of a call option wants the price of the underlying instrument to rise in the future"
I'm no expert but I think it means a lot of people knew this was going to happen and bought call options knowing the share price would rise. 3com closed at $5.69 and HP bought it for $7.90.
* 3Com stock is up 35% (at $5.69) in after-hour trading because HP is offering a premium to the current stock price to acquire it. A call option to buy the stock for the fixed price of $5 (until it expired next Friday) sold for 80 cents when the market closed.
* 3Com is up 2 bucks (35%) in the after market. The value of that call option will increase by around that mount. So the price of the option went up from 0.80 to ~2.80. That is an increase of 250%, which is way higher than 35%. This leverage is one reason people trade options.
* The option buyer used a market order ("bought on the ask") to buy a ton of options, which is executed immediately at current market price. More cautious buyers tend to use a limit order in markets that don't trade a lot (like this one). A limit order will buy at no more, or sell at no less, than a specific price. This will move the market price less.
* Given that the acquisition was announced later today, this large order of options is suspicious. This trade will almost certainly be investigated by the SEC.
In a nutshell, what he means is that news of the acquisition was leaked to the public, which explains the huge interest in the 3COM stock; it saw unusual uptick in the traders' interest in it, meaning there was information those traders were privy to. If you know someone was going to buy a company for an X amount of dollars per share, and you had the opportunity to purchase those very shares before the acquisition for X-Y dollars. If you bought N shares, you would be making N*Y dollars in profit, with in a few days (until the sale is final.)
Not bad.
That's the thing, it wasn't. The entire volume was done on a single trade by a single buyer... that's fraudulent.
Same thing happened with Perot systems, and the guy got picked up by the SEC.
Say there's a stock, and on average it trades 100,000 shares per day. And then one day, we see large orders, someone actively buying shares on the offer, about 450,000. And then the day after the stock jumps up on being acquired. The odds are very high that someone new ahead of time.
The same thing happens in the options market. The COMS options market is relatively dull. It doesn't trade much, and there are not that many contracts open. Then all of a sudden a player goes out and buys 6,000 calls, half of which expire in 10 days. These contracts give them the right to buy COMS at $5 a share.
The volume traded today was about 17x normal, and these contracts were bought to open.
So at 12PM a trade came out and bought 3800 Nov 5 Calls for 0.65. They also bought 3100 Dec Calls for .80. I'm sure this wasn't a calendar spread as the November calls were bought not sold.
So someone put about 500k down on a very speculative bet. And now the name is up 35% aftermarket.
Not including any premium, the contracts are now worth about 2.70. So they made about 1.5M, or a 300% return overnight.
Anyways, I just laid out the premise for an SEC investigation (and hopefully) prosecution. If they don't they're either cowards or stupid.