Monday, June 3, 2013

Was There A Leak, From The ASCO Press Embargo, Last Friday? 30 TIMES normal option volumes -- ALL to expire this Friday?!

Let's label this one "the trader who saw the actual Lambo Murciélago embedded" in the embargoed ASCO materials last Friday.

One of the earmarks of a novice's insider trading attempt is the use of very short-dated stock options (and in very high volumes). In the case described below, the trader bought 30 times the normal daily volume -- in a matched pair of standardized options that expire this coming Friday. So the trader was betting that there would be a major price move within five trading days. I could be wrong, but that smells like insider trading. Why?

Well, because, in the mega-cap multinational pharma sector (Merck is the world's second or third largest public pharma company, depending on how one measures), those sorts of moves almost never occur -- and certainly, not right on a two-minute-egg-timer.

But that's what this trader would have us believe he or she figured out -- independently. Seeing more than a 5 per cent increase in the stock of a company like Merck -- where tens of billions of dollars of new revenue will be needed to move the needle up, or a loss of a like amount will be needed to force the needle down -- just. isn't. very. likely. to. be. perfectly. timed.

And it would take perfect timing to call this sort of a move (which is implied by the purchase of options so close to their expiry date). So, I expect the SEC is already looking closely at this trade -- and the trader behind it, given that the investing press has already noted it. The 30 times normal volume was going to trip alerts at the SEC, in any event. I wish the trader good luck in pointing to how she/he knew to make the trade -- beyond sheer luck. The SEC will never buy that -- and it has to be something that was known to the public, as of Friday.

Here's a bit from the story -- do go read it all:
. . . .Big pharma is usually a slow-money sector, but one investor wants to make a quick buck in drug maker Merck.

optionMONSTER's Heat Seeker monitoring program detected the purchase of 3,738 Weekly 47.50 calls expiring this Friday for $0.76. An equal number of the Weekly 47.50 puts was sold simultaneously for $0.77. Volume was more than 30 times open interest at both strikes, indicating that a new position was initiated.

The investor collected a credit of $0.01 from the put sale and now controls the equivalent of 373,800 shares through the long calls. The trader can theoretically earn infinite profits above $47.50 but will lose money below that level. (See our Education section for more on how to generate leverage with options.)

MRK fell 0.79 percent to $46.70 on Friday. [But Merck is up almost 5 per cent in NASDAQ pre-market, this monring]. . . .
IF (and that's a big if!) the trader is allowed by the SEC to keep the profit here (that is, it was a legitimate trade), s/he has already pocketed over $500,000 (about the price of new Murciélago!) -- at the NYSE open, this morning. Clearly the trader dumps the puts, and holds the calls, from here. Wow.

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