Well-timed trades in the U.S. options market on H.J. Heinz Co HNZ.N before a takeover plan by Berkshire Hathaway and 3G Capital was publicly disclosed, prompted some option-market experts on Thursday to question whether people with knowledge of the deal made bullish bets ahead of the announcement.
Warren Buffett's Berkshire Hathaway Inc (BRKa.N) and Brazilian private equity firm 3G Capital on Thursday announced a $72.50 per share cash deal for the ketchup and baby food maker, sending the stock up 20 percent.
On Wednesday, there was a sudden burst of bullish call options buying, expecting that H.J. Heinz shares would rally in coming months, which may be too much of a coincidence to overlook. The one-day gains on these bets would net at least a $1.5 million paper profit, according to Trade Alert.
"The Heinz deal today has surprised many. But there was at least one individual in the options market who knew that a deal was imminent," said Jeffrey Rubin, director of research at financial research firm Birinyi Associates Inc in Westport, Connecticut.
To be sure, the questionable trading could be the result of innocuous speculation that can sometimes fuel action in the options markets.
The U.S. Securities and Exchange Commission, which looks into unusual stock and options activity, declined to comment in an email to Reuters. Exchange operator CBOE Holdings Inc (CBOE.O) also declined comment. Bloomberg reported that the SEC was reviewing the activity though that may not result in a formal investigation, citing a person familiar with the matter.
On Wednesday, a total of 3,460 calls, contracts giving the buyer the right to buy a stock at a certain price by a given date, changed hands on Heinz, four times its recent daily average of 820 contracts. By contrast, just 249 bearish put options were traded, about half their typical daily level, according to options analytics firm Trade Alert.
Nearly 2,600 of those contracts were in the June $65 strike calls.
"To see call volume four times its normal level concentrated in out-of-the-money June strikes immediately in front of a deal is highly suspicious," said Trade Alert President Henry Schwartz. "It looks to me like a case of somebody trading on some good advance knowledge of the deal."
When investors speculate on a possible takeover, they typically buy out-of-the-money calls because they can put less money at risk and rake in a big return when a deal is announced. Owners of these calls benefit when the stock rises because the value of the call options also rise.
Trade Alert's Schwartz said more than 2,000 June $65 strike calls traded on Wednesday for a premium of 30 to 40 cents per contract. The calls cost a premium of just $92,000 at that strike, he said. Heinz shares had closed on Wednesday at $60.48.
Heinz shares gained nearly 20 percent in Thursday afternoon to close at $72.50, having earlier hit a high of $72.60. Meanwhile, the cost of the June $65 strike calls soared to $7.50 per contact - which could result in a $1.5 million paper profit, Schwartz said.
Wednesday's volume in those $65 June calls came to 2,593 contracts. Over the last three months, average daily volume for all Heinz call options was just 1,986 contracts, according to options analytics firm Livevol in San Francisco. That is notable because Heinz shares had never reached the $65, having hit an all-time high of $61.75 in November 1998.
"It appears that some traders were betting that the shares would trade above $65 for the first time ever in just four months and the next day there is a takeover bid for well over $65," said Ophir Gottlieb, managing director of Livevol.
"These trades are suspicious and incredibly well-timed."
The stock market has long had restrictions on insider trading, where company officers or those in the know use privileged information to trade stock ahead of an event.
But the options market also has surveillance which is under the SEC and the U.S. options exchanges themselves.
The U.S. options exchanges, because of their proximity to unusual activity, are often in a better position to determine questionable trades. In 2006, they set up the Options Surveillance Regulatory Authority, or ORSA, as a central organization to collaborate on insider trading surveillance and investigations for the U.S. options industry.
CBOE, which leads the coordinated efforts on the behalf of the U.S. exchanges, said that it takes its regulatory responsibility seriously and investigates unusual trading activity.
"However, we do not comment on individual investigations," a CBOE spokeswoman said. (Reporting By Doris Frankel; Editing by Tim Dobbyn)