Wednesday, May 9, 2007

Another Deal, Another Spike in Options Trading

It's the same refrain: a deal is announced -- usually a buyout by a private equity firm -- and in the days before the public disclosure trading in out-of-the-money call options shoots up.  The latest example: the acquisition of Florida East Coast Industries by Fortress Investment Group for $84 per share, a bit more than $10 above its market price prior to the announcement on May 8.  According to a Bloomberg article (here), the average daily volume in Florida East Coast options was 375 per day, but on April 30 it was 1,888 contracts, and then 4,722 contracts on May 2.  The most active options the day before the deal were the May 80s, which would expire in a bit more than two weeks and were fairly deep out of the money -- until the announcement, of course.  Insider trading, perhaps?  Time (and the SEC) will tell.

Meanwhile, in another insider trading case, Credit Suisse investment banker Hafiz Naseem was released on $1 million bail while he faces charges of tipping a Pakistani banker about pending deals that garnered over $7 million in profits.  A man identified as the tippee denied that Naseem gave him any inside information, saying that he only received "generic" information, whatever that means.  A Sharewatch story (here) discusses the bail grant. (ph)

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A proper law should be enforced to protect retail investors. Insider trading should be declared and make it public. This is because insider trading usually involves a huge amount of money and it will affect the security prices either up or down drastically. It will cause a huge loss to the retail investors. Therefore, transaction involves insider in the companies should be regulated with certain rules that will protect the retail investors from incurring huge losses.

Posted by: Alexchong | Nov 24, 2008 7:42:03 AM

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