A windfall bet made in H.J. Heinz Co. options one day before a buyout was announced Thursday prompted regulators to act quickly, freezing assets they suspect are tied to the trade.
But the Heinz bet, which the Securities and Exchange Commission said could have paid out $1.7 million, was just the latest in a series of unusual options trades made ahead of the disclosures of big deals and other news that moved share prices.
Over the past year, unusually large positions were established shortly in advance of news that moved shares of Nexen Inc., Youku Inc., Human Genome Sciences Inc., Constellation Brands Inc. and, most recently, CBS Corp. All turned profitable after the news.
A spokeswoman for the SEC, which regulates stock and options trading, said the agency would neither confirm nor deny the existence of inquiries into trading tied to those companies.
No charges have been filed in the Heinz case, which was linked to a Swiss trading account, but the move to freeze the assets is one of the fastest enforcement actions ever filed by the agency, according to officials. The SEC said Friday that the timing and size of the trades were highly suspicious given the account had no history of trading in Heinz securities in the last six months.
Options positions can be a particularly profitable way to speculate on a stock because of the leverage options offer. Each contract grants the right to buy or sell 100 shares of stock for a set price by a set date, and they are generally much cheaper than buying shares outright.
Market participants say the price-targeting nature of options also means it can be easier to ascertain an investor's expectations.
"The options world is so much more transparent than the stock world for spotting these things, because you can figure out the rationale of the trade based on how they set it up," said Brian Overby, senior options analyst at online brokerage TradeKing. "When you see a big 'lottery ticket' trade with such a low probability of paying off with normal market conditions, it becomes a head-scratcher."
To be sure, a well-timed trade doesn't necessarily indicate the presence of inside information. For every unusual trade that pays off big, there are many more unusual trades that don't, with options expiring worthless, Mr. Overby said. "It's not always going to be someone who knows something."
But a number of investors appear to have benefited from well-timed trades over the past year, based on trading data from options-data firm Trade Alert. Last month, options on CBS stock saw a surge of activity in the six sessions before the TV company said it would spin off some assets.
In June 2012, an options trader looked set to gain about 365% on Constellation Brands options after Anheuser-Busch InBev NV said it was in talks to buy Constellation's joint-venture partner Grupo Modelo SA.
In April, an options trade made a bet on a steep climb in Human Genome Science that stood to profit nearly $3.5 million overnight as the biotech company's shares surged with news of an unsolicited takeover bid from GlaxoSmithKline PLC.
On March 12, Youku said it would acquire China's No. 2 video website, Tudou Holdings Ltd. That paid off for an investor who had set up an options trade the prior Friday looking for shares to add more than 12% over the next week.
In each instance, the trades drew attention from market participants not only for being placed shortly ahead of the deal, but also because the sizes of the bets were far beyond what was typical in the market.
Representatives for Youku, GlaxoSmithKline and Heinz didn't respond to requests for comment. A spokesman for CBS and a spokeswoman for Constellation Brands declined to comment.
Spokesmen for Heinz's acquirers, Berkshire Hathaway Inc., and private-equity firm 3G Capital also declined to comment.
In an action related to stocks, not options, last July, the SEC froze the assets of alleged inside traders in shares of Canadian oil-and-gas producer Nexen after a takeover bid from China's Cnooc Ltd. was announced. Well Advantage, a Hong Kong-based investment firm, in October agreed to pay more than $14 million—twice the amount of its alleged illicit profits—to settle the insider-trading charges filed by the SEC. The firm didn't admit or deny the charges.
But options activity in Nexen that some market observers saw as suspicious doesn't appear to have garnered the same response. Three large options positions established ahead of the deal looked set to bring in a combined $39.5 million once the Cnooc deal for Nexan was made public. The SEC didn't announce an investigation into unusual activity in options at the time of the stock probe. On Friday, an SEC spokeswoman declined to comment on whether the agency had initiated an inquiry into the options trading.
A spokeswoman for Nexen didn't respond to a request for comment.
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