[miningmx.com] — A NUMBER of well-timed bullish bets in options of Petrohawk ahead of Thursday’s announcement of the US gas producer’s pending takeover has raised eyebrows among some options market watchers, who said the activity could also draw the eye of securities regulators.
Global miner BHP Billiton unveiled a $12.1bn bid, or $38.75 a share, for Petrohawk Energy Corp. which represents a 65% premium to Petrohawk’s closing stock price on Thursday.
“There was some unusual call buying on June 27 (in Petrohawk) that we cited on our blog and again on Thursday. We view this activity as suspicious,” said Jon Najarian, a co-founder of online brokerage TradeMonster.com in Chicago.
Although these select option trades have raised eyebrows, it can be hard to pin down whether unusual trading patterns in a target company’s options stem from insider information, as it could also reflect speculative bets.
The US Securities and Exchange Commission, which looks into unusual share and options activity, declined to comment.
Part of the unusual call activity on June 27 appeared to be related to a big options play known as a risk reversal, according to data from options analytics firm Trade Alert.
The strategy involved the purchase of 30,000 January 2012 $25 HK calls for a premium of $2.48 and the sale of the same amount of January $21 HK puts for $2.13 apiece and was tied to the sale of 2.4 million shares at $23.16 at that time, resulting in a net premium paid of 35 cents for the package.
Clearly switching to options in this trade was far more profitable than staying with the underlying stock despite the fat premium paid on the takeover. On Friday, the January $25 strike call was as high as $13.50 per contract, better than a five-fold gain and the January $21 put is now worth a nickel.
The trade would be most profitable with shares rising well above $25 by January expiration. It appears to be a stock replacement trade in which the customer liquidated the shares they had owned in favor of long calls and short puts, said Trade Alert President Henry Schwartz.
A risk reversal is a three-part strategy consisting of the sale of a put and the purchase of a call – both with out-of-the-money strikes – combined with the short sale of the underlying shares. In this case, the owner may have implemented the strategy to get more bullish participation through the purchase of call options and the sale of stock.
“That big reversal will probably be scrutinized by regulators,” Schwartz said. The choice of using six-month options was likely due to expectations that the deal might happen before the end of the year.
“This tells us that this was a very well-informed investor who made a large bet about an upside move such as today. But it was unclear whether or not they knew the exact timing.”
“It is not necessarily an insider trade but it was really well timed,” said Mark Sebastian, chief operating officer of options education firm optionpit.com in Chicago.
“The contract is in January, and this investor has been adding on to this trade for several weeks,” Sebastian said.
Based on Najarian’s data, several large call trades also occurred in Petrohawk on Thursday near the stock market close.
Most noteworthy was the purchase of 1,351 August $26 HK calls as well as several large prints at the August $24 strike call with Petrohawk trading at $23.49, Najarian said.
Those August $26 calls, which fetched 44 cents per contract, were worth at least $12.70 on Friday, given the takeover bid. Healthy profits will also be realised on the August $24 calls, which reached a high of $14.40 per contract compared to the initial purchase of just $1.08 apiece.
But Trade Alert’s Schwartz said the direction of the August $26 call trade was unclear and did not produce new open interest, suggesting that it does not appear that it could be somebody trading ahead of a deal.
Petrohawk shares jumped 62.49% to $38.17 on Friday on the New York Stock Exchange.
