By: John J Critchley, Jr.
There is an old saying by Lefty Gomez " I would be rather be lucky than good." Well, for one lucky customer Monday July 30th was one of those days. Chicago Bridge & Iron Co (NYSE:CBI) announced that it would buy Shaw Group (NYSE:SHAW) for about $3 billion in cash and stock. This merger would create a large engineering and construction company focused on the energy sector.
On Thursday July 26th, this customer bought 2,000 SHAW August 29 calls for $.25 Total outlay: $50,000.
On Monday July 30th, CBI offered $46 per share - $41 in cash and $5 in stock. This represented over a 70% premium to Shaw's closing price the proceeding Friday.
With SHAW up more than 55 percent since the deal was announced, these calls are now trading at $10.50 Worth: $2,100,000.
The total profit for this savvy customer was a cool $2,000,000. This represents over a 5,000 percent return for the investor and is sure to have raised some eyebrows in the securities enforcement world. Why the suspicion? Firstly, these calls were nearly 15% out-of-the-money before the customer purchased them and now are very deep in-the-money. Secondly, before the trade occurred the delta in these calls options was approximately 0.15. This means that there was a roughly 15% percent chance that these options would be in-the-money by at least $.01 by expiration. The fact that these low probability options are now over $10.00 in the money has surely raised some red flags over at the SEC. The timing of the trade, just a few days before the announcement also appears quite fortuitous.
These type of unusual trades before a merger announcements are not that uncommon in the options market. The SEC has recently accused a Hong Kong-based firm of insider trading ahead of the public announcement that China's oil producer CNOOC planned to acquire Nexen.(Source: Click here)
We have no knowledge that this trades were based on inside information, but the timing and incredible profit generated by them has surely raised the antennas of the regulators.
We all can wish to be so lucky with our trades.
Notes: Prices quoted where the prices at time of submission and do not reflect current market prices. You are solely responsible for your own trading and investments decisions and the ideas presented in this article are trade analysis, for educational purposes only and do not constitute buy/hold/sell recommendations
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.