Saturday, January 29, 2005
A report in the Wall Street Journal (Jan. 28) discusses heavy purchases of Gillette February call options right before the close of trading on Jan. 27, after which word began to leak out about the acquisition of Gillette by Procter & Gamble. Buying a call option, especially one set to expire in less than a month at a price well above the underlying stock's current market price, is a particularly bullish bet -- and often a signal of insider trading. According to the Journal report:
The heaviest trading was in Gillette's short-term February options, and 4,224 February 45 calls changed hands Thursday. Each of these calls gives the right, until mid-February, to buy 100 shares of stock at $45 apiece, and were valued at between $75 and $135 Thursday. By Friday, after the deal with P&G made headlines, Gillette shares gained $5.44 to $51.13. Each February 45 call is now worth between $610 and $630 Friday morning -- a nearly sixfold increase in less than 24 hours. Altogether, there were 6,525 Gillette February 45 calls currently outstanding.
My quick estimate, based on purchasing 4,000 calls at the highest price and selling at the lowest identified price, is that the transactions could yield a one-day profit of $1.9 million, and the actual profit is likely much higher, although the trades may have been conducted by more than one person or group. That kind of gain gets the attention of the SEC in a hurry, and we can expect to see the first cases filed in the next week or so, especially if any of the trading were conducted through an off-shore account that sought to liquidate its position. The Commission routinely files for a TRO to have the accounts frozen pending its investigation, and the courts (usually the Southern District of New York) just as routinely grant the temporary freeze orders. Moreover, when this type of brazen trading takes place, the U.S. Attorney's Office will not be far behind. (ph)