Thursday, May 3, 2007

Options Explosion in Dow Jones

The surprise $5 billion bid by Rupert Murdoch's News Corp. for Dow Jones & Co. may not have been quite as surprising to some who bought call options on the publisher of the Wall Street Journal before the announcement.  In a continuing refrain when large offers are made for companies, trading in the options spiked in the days before the information became public, netting some "lucky" traders outsized profits.  In this case, a Bloomberg story (here) notes that the average volume in Dow Jones call options in the month before the bid was a bit more than 300 per day, but on April 25, four trading days before the announcement, the volume was over 3,000 contracts; on April 30, the day before the bid emerged, the volume was over 4,300 contracts.  The article notes that all the 3,464 September 45 call options, which were well out of the money, that traded on April 30 were purchased in the last eleven minutes before the market closed at 4:00 p.m. EDT.  The price on these calls jumped from less than $.50 to a $12 close the next day, which is at least a 2,400% return in one day -- I won't even try to annualize it.  Timing in life is everything, but that's just way too much to not draw a lot of attention from the SEC and the U.S. Attorney's Office. (ph)

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