Well-timed options trades before NYSE deal raise eyebrows

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Published December 20, 2012

| Reuters

A surge in bullish options bets on NYSE Euronext shares ahead of Thursday's announced merger has raised eyebrows among options strategists.

IntercontinentalExchange said on Thursday it planned to buy NYSE Euronext for $8.2 billion, or $33.12 per NYSE share. The deal's value represents a 37.7 percent premium over NYSE's closing stock price on December 19, the companies said.

NYSE Euronext option trading volume on Wednesday was below average. But in the two-week period before the news, overall volume was about 27 percent above normal turnover, with a buildup of call options, according to Trade Alert, an options analytics firm in New York. A call option is a contract that gives the right to buy the company's stock at a fixed price by a certain date.

A total of 51,000 calls and 8,600 puts changed hands during the period from December 6 through December 19.

"It looks to me there may have been some information leakage earlier this month, given the heavy call volume and shift in skew," Trade Alert President Henry Schwartz said.

The U.S. Securities and Exchange Commission, which looks into unusual stock and options activity, declined to comment.

TURN OF THE SKEW

Over the two weeks from December 6 through December 19, there were more than 9,100 new positions in the January $24 calls. Buyers on December 6 were paying a premium of 44 cents per contract for those calls. That cost rose to $8 apiece by Thursday's session - a 1,700 percent increase, Schwartz said.

As of Thursday, open interest in the January $24 strike NYX calls stood at 10,343 contracts, the greatest of any call across all expirations for NYSE Euronext, according to data from Livevol, an options analytics firm in San Francisco.

That open interest has accumulated over the last 14 days, with the NYSE Euronext stock's price ranging from $23 to $24 throughout the December 6 - December 19 period.

"This suggests suspicious activity, given the timing of the announcement of the merger," said Ophir Gottlieb, managing director of Livevol.

Livevol data showed about 9,000 January $24 strike calls were bought for about 50 cents per contract during that time.

"So a $500,000 bet turned into a potential $6.5 million gain in 14 days," Gottlieb said.

In addition, there has been a recent shift in the pricing of NYX upside calls, compared with NYX downside puts. For most of this year, NYX bearish put options were more expensive than call options.

But since early December, the price of the calls outstripped the price of the puts and has stayed that way consistently. This measure, known as the "skew," or the difference in premiums paid between puts and calls, fell to its lowest level of the year on Wednesday, according to Trade Alert's Schwartz.

This inverted skew is unusual and is "typically associated with takeover candidates," Schwartz said. Participants were willing to pay more for out-of-the-money calls compared with out-of-the-money puts that are at a similar distance from the stock price.

"The put-call skew suggests traders were pricing in a higher chance of an upside move in the shares than a downside move in the short term," he said.

When traders buy out-of-the-money calls, which are contracts with strike prices way above the stock's value, they are looking for a big premium to be paid for the takeover candidate, risking the least amount of money for the biggest return.

Underscoring the interest in bullish options, total open interest in NYSE Euronext calls has been rising at a faster clip than outstanding put contracts since December 1. Call open positions rose to 87,000 contracts this month so far from 53,000 contracts on December 1, Schwartz said, while put open interest climbed to 39,000 contracts this month so far from 36,000 at the beginning of December.

(Reporting by Doris Frankel; Editing by Jan Paschal)

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