Icahn's Clorox Bid Yields Large Options Gains Friday
15 Juli 2011 - 8:39PM
Dow Jones News
Activist investor Carl Icahn's bid for Clorox Co. (CLX) resulted
in sizeable paper profits Friday for unusual stock-options trades
that took place early this week.
The large trades turned heads in the options market when they
hit the tape Monday. That's because the July-expiry call options
were an especially risky bet. They would have dwindled to zero by
the close of trading Friday without a big jump in the stock. There
was no Clorox news Monday.
The options' value surged after word of Icahn's $10.2 billion
bid for the consumer-products company Friday. As the stock jumped,
some of the options contracts rose to as much as 15 times their
Monday price. Clorox shares added $5.89, or 8.6%, to $74.32 in
midafternoon action.
The identities of traders behind activity in the options market
tends to be closely held by market makers and others in the
market.
"Call that a big win," said Etai Friedman, head of equity
derivatives trading at MKM Partners. "The timing was uncanny, but
the [rumors] had been out there circulating for many weeks,"
Friedman added.
In a letter to Clorox Chief Executive Donald Knauss, Icahn--who
said his stake is now 9.4%--encouraged a go-shop process where the
company would have the opportunity to entertain other bids. He said
possible strategic buyers for the company might include Procter
& Gamble Co. (PG), Unilever NV (UN), Colgate-Palmolive Co. (CL)
and Kimberly-Clark Corp. (KMB), among others.
The options market routinely plays host to highly speculative
trading on buyout rumors. Risk-taking participants use the
contracts -- which convey the right to buy or sell shares at a
fixed price over set times frames -- to bet for or against various
takeover scenarios. Most don't play out.
It was the especially short time frame for this week's Clorox
options bets that struck some analysts.
The value of options contracts that aren't profitable, or "in
the money," falls as their expiration date approaches. They reach
zero at expiry.
Nearly 4,600 of call options to buy the stock at $70 by Friday's
close changed hands on Monday. The activity was scattered in blocks
of 50 to 201 contracts, each of which grant the right to buy 100
shares. Prices ranged from 15 cents per share to $1.60, but leapt
as high as $4.60 Friday.
One block trade of 50 contracts that cost $5,000 Monday surged
to as much as $23,000 in recent action, a 360% profit in four days.
As of midsession, traders had yet to book profits on the bulk of
the now-profitable $70 contracts.
Monday's activity in Clorox call options was spread across five
different options exchanges.
"Either they knew what was going to happen, or they piled in
[after] whomever had started to buy the options for speculative
positioning," said Caitlin Duffy, options analyst at Interactive
Brokers. "I would say more that Monday's trading raised an
eyebrow."
A spokeswoman for the Securities & Exchange Commission
declined to comment on the activity. A spokeswoman for the Options
Regulatory Surveillance Authority said the agency reviews unusual
trades on a regular basis but does not comment on any specific
instance. Representatives for the five options exchanges declined
to comment, with some adding they also review unusual trading as a
routine practice. Representatives of Icahn Capital LP did not
immediately comment.
As the value of Clorox's bullish call options surged Friday,
bearish put options conveying the right to sell shares by the end
of Friday's trading plunged. Puts to sell the shares at $70 fell
from $1.50 on Thursday to a nickel in recent action.
"There's going to be a lot of pain for those that were short
[with] options," before the contracts expired in the money, Patrick
Mortimer, director of options trading at Pipeline Trading Systems
LLC.
Monday's action was the highest single-day trading activity in
Clorox call options since October. Friday's post-Icahn call action
was nearly three times Monday's as of afternoon trading, and the
highest since April 2010, Trade Alert data showed.
-By Brendan Conway, Dow Jones Newswires; (212) 416-2670;
brendan.conway@dowjones.com
-Mia Lamar contributed to this article.
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