Call Buying Surged Before 3Com Takeover Announced

Options action took a bullish turn in 3Com (COMS) Wednesday, just hours before Hewlett-Packard (HPQ) said it would acquire the networking company for $2.7 billion.

optionMONSTER's Heat Seeker tracking program detected heavy buying of the November 5 calls for $0.65 and the December 5 calls for $0.75 to $0.80. Volume was more than triple open interest in both strikes.

The trades pushed options activity in the name to 13 times greater than average. Calls outnumbered puts by a very bullish 1,348-to-1 ratio.

COMS rose 5.18 percent to close the regular session at $5.69 but has jumped to $7.65 in after-hours trading. After the bell HPQ announced that it would pay $7.90 a share in cash for the company, a 39 percent premium. Hewlett-Packard officials didn't immediately return a call seeking comment.

If the transaction is completed as announced, both call contracts will end up valued at about $2.90, a gain of 346 percent for the November strikes and 263 percent for the December contracts.

Although no investigation by regulators has been announced, Wednesday's call buying could be interpreted as a potential sign of insider trading. Sometimes perpetrators will buy options expiring in two different months because they are not sure exactly when a deal will be announced. (See this special report for more on how options have been used by insiders and how they get caught.)

(This story was written by David Russell and Jon "DRJ" Najarian. Chart courtesy of tradeMONSTER.)

By: David Russell ([e-mail])

Comments

[Tom Armistead:]

Sounds like insider trading. I sent a copy of the article to the SEC as a tip.

Nov 12 08:54 AM

[Winston Smi...:]

Hmm...let's see Goldman Sachs Group advised 3Com on the transaction, while Morgan Stanley helped Hewlett-Packard. It couldn't possibly be anyone connected to Goldman, could it?

Nov 12 09:30 AM

[Moon Kil Woong:]

Figuring out the trade is not hard. Linking it to someone and proving they got the information is the complicated part. Undoubtedly, they will call it a drade based upon the public rumor. The public being no one we or any of the general public would ever know of course.

Nov 12 09:35 AM

[ebworthen:]

I think I'll take out a home equity loan to invest more money in this shell game.

What do you think gang, double down on the little ball being under the Citibank coconut?

Maybe I can get some 0% money from Timmy and Ben; I'd probably buy gold with it, but then they'd just confiscate it down the road in memory of FDR.

Nov 12 10:04 AM

[Nikola:]

God's work....

Nov 12 11:08 AM

[tunaman4u2:]

And I'm sure tons of people will be arrested for it...

You get arrested for stealing a candy bar but millions from the public in a few hours = turn the other way

Nov 12 11:17 AM

[Windsun33:]

This is so blatant I don't see how they can cover it up.

Nov 13 12:13 AM

[davidbdc:]

Yep, they can find the parties involved but then have to track the information flow........

Still it can't hurt for the Feds to throw some folks in jail and threaten them with the loss of everything if they don't talk......even a couple of days while bail is being set is better than nothing.

For everyone's sake I hope there are some severe crackdowns coming.....the public anger towards the Wall Street crowd is boiling and this type of thing just reinforces the average person's belief that everything is rigged. When folks no longer believe that hard work and fair play are the basis for our system of living we risk massive upheaval. Where Wall Street plunders with electonic trades, the masses will plunder physically. People will only sit and watch their family's standard of living sink for so long when others are blatantly stealing........at some point in time they will do likewise.


On Nov 12 09:35 AM Moon Kil Woong wrote:

> Figuring out the trade is not hard. Linking it to someone and proving
> they got the information is the complicated part. Undoubtedly, they
> will call it a drade based upon the public rumor. The public being
> no one we or any of the general public would ever know of course.

Nov 13 05:38 AM

[Ed Zimmer:]

let's just consider every trade on this deal yesterday as an inside trade, triple the amount in fines and go after their pocketbooks. People are getting fed up with all the shenanigans and with nearly 1 in 5 out of work (dependent upon which figures you believe), winter coming and prospects bleak, thoughts will not be turning towards peace on earth, goodwill to man.

Nov 13 09:16 AM

[john s. gordon:]

where there is smoke there is insider trading.
GS has been absolutely shameless so many times.
> jack

Nov 14 09:58 AM